Circular No. 174/1998/TT/BTC dated December 24, 1998 of the Ministry of Finance guiding the application of the value added tax and the enterprise in come tax for activities in insurance business

CIRCULAR

GUIDING THE APPLICATION OF THE VALUE ADDED TAX AND THE ENTERPRISE IN COME TAX FOR ACTIVITIES IN INSURANCE BUSINESS

In furtherance of the Law on Value Added Tax No. 02/1997/QH9 May 10, 1997, Decree No.28/1998/ND-CP of May 11, 1998 of the Government detailing the implementation of the Law on Value Added Tax, Decree No.102/1998/ND-CP of the Government of December 21, 1998 providing supplements and amendments to a number of articles of Decree No. 28/1998/ND-CP of May 11, 1998 of the Government detailing the implementation of the Law on Value Added Tax and Circular No. 89/1998/TT-BTC of June 27, 1998 of the Ministry of Finance guiding its implementation.
n furtherance of the Law on Enterprise Income Tax No. 03/1997/QH9 of May 10, 1997, Decree No. 30/1998/ND-CP of May 13, 1998 of the Government detailing the implementation of the Law on Enterprise Income Tax and Circular No. 99/1998/TT-BTC of July 14, 1998 guiding its implementation;
In order that the enterprises engaged in insurance business correctly carry out the provisions of the Law on Value Added Tax and the Law on Enterprise Income Tax, the Ministry of Finance hereby provides detailed guidance for the calculation, declaration and payment of VAT and enterprise income tax for insurance business activities as follows:

I. VALUE ADDED TAX

1. Subjects liable to VAT:

Subject to VAT in the insurance business enterprises are insurance services and other services and goods used for production, business and consumption in Vietnam (except non - VAT services

- Non - life insurance services.

- Services of evaluation agent, compensation consideration agent, agent for claim on third parties...

- Trading in other goods and services.

2. VAT payers:

VAT payers as directed in this Circular are insurance enterprises conducting insurance business activities in Vietnam in the categories subject to VAT, including: State enterprises, joint stock companies; reciprocal companies, joint venture companies; insurance companies with 100% foreign capital; branches of foreign insurance organizations...

3. Non - VAT paying subjects:

Under the provisions of Clause 8, Article 4 of the VAT Law, the following insurance services are not subject to VAT

- Life insurance, school pupil insurance and human insurance works like crew members and sailors accident insurance, insurance against human accidents (including accident and life insurance combined with hospitalization), passenger accident insurance, tourist insurance, insurance against driving accidents for drives, assistant drivers and passengers on vehicles, insurance for sterilization volunteers, insurance allowance for hospitalization with surgical operations, insurance for personal life, insurance for users of electricity...

- Insurance for raised animals, plants and other agricultural insurance services.

4. Prices for tax calculations:

The Prices for calculation of VAT in the insurance services and other services and goods supplied by the insurance enterprises shall be determined as follows:

- For the primary insurance, it is the primary insurance charge (including surcharges and the extra charge which the insurance enterprise is eligible for (if any) without VAT recorded on the VAT voucher.

+ In case the insurance charge as prescribed by the Ministry of Finance has already included VAT (paid price), the pre-VAT insurance charge shall be determined as follows:

+ In case it is agreed in the insurance contract, insurance application and insurance certificate to collect insurance charge in each quarter, the VAT shall be calculated on the amount paid quarterly. If it is agreed to pay a lump sum in advance, the VAT shall be calculated according to the price paid in a lump sum in advance without VAT.

Example: On January 10, 1999 the Vietnam General Insurance Corporation signed an insurance contract to ensure a trawler of the East Sea Marine Product Company with an insurance charge estimated at VND100 million (assuming that this is the charge level prescribed by the State including also VAT, i.e. the paid price). The contract is valid for five years and the time limit for paying is written in the contract as follows: in the first year, within 15 days after signing, the East Sea Marine Product Company shall have to pay to the General Insurance Corporation 70% of the insurance charge, in the following years 10% annually, and by the 4^th year all the insurance charge shall have been paid as agreed upon.

Accordingly, the price for VAT calculation of the insurance service charge for the above - said ship shall be:

Income for VAT calculation of the General Insurance Corporation for each year shall be: first year: VND 90.9 million x 70% = VND 63.63 million (which is also the income for VAT calculation of January 1999), and for each of the 2^nd, 3^rd and 4^th years shall be: VND 90.9 million x10% = VND 9.09 million (income for VAT calculation of the four years shall be VND 90.9 million). In this case, though the insurance valid for five years, the turnover for VAT calculation (output) shall be determined in only the first four years.

- For the evaluation agent service and the compensation consideration agent service, the agent for third party claiming service etc. to be paid salary or commission, the income for VAT calculation is the salary or commission without deduction of any expenses that the insurance enterprise shall collect.

- For the other goods and services, it is the selling price of goods and services without VAT written on the VAT voucher.

5. Tax rate:

VAT rate shall apply to insurance business activities including insurance service, evaluation agent service, agent to consider compensation, for third party claiming service and other services in the insurance business activities. It is set at 10%.

For the business activities other than the above said insurance business activities, the tax rates prescribed for each kind of goods and services as concretely defined in Clause II, Part B of Circular No. 89/1998/TT-BTC of June 27, 1998 of the Ministry of Finance shall apply.

6. Method of tax calculation:

Insurance enterprises shall have to pay VAT according to the method of tax deduction. The VAT to be paid is determined as follows:

VAT to be paid = Output VAT - Input VAT

Output VAT = Taxable services and goods turnover from sales x VAT rate.

*. Output VAT is determined on the basic of the turnover from the sale of the following taxable services and goods.

- Turnover from insurance business activities including:

+ Primary insurance charge of the VAT of the works subject to VAT

+ Turnover from insurance evaluation agent (excluding mutual help among member units with internal accountancy within the same general corporation or corporation), agent for consideration of compensation, agent for claiming the third party, agent to handle goods with 100% compensation, handling of goods with 100% compensation and other turnovers from insurance business activities.

- Turnover from other services and goods (aside from insurance business activities) subject to VAT.

*. Turnover from the sale of services and goods subject to VAT which have been taxed at the primary insurance shall not be subject to VAT as prescribed in this Circular. They include:

- Income from reinsurance ceding compensation and other incomes from compensation (if any)

Commission from reinsurance acceptance and other incomes from reinsurance acceptance (including charge from re-insurance from insurance business enterprises operation on Vietnam territory and outside Vietnam territory)

- Income from claims against third party

b. Input VAT

Input VAT = Total VAT written on the VAT vouchers of purchases of goods and services or vouchers of VAT payment of imported goods.

Besides, according to Clause 3, Article 1 of Decree No.102/1998/ND-CP of December 21, 1998 of the Government providing supplements and amendments to a number of articles of Decree No. 28/1998/ND-CP of May 11, 1998 of the Government detailing the implementation of the Law on Value Added Tax, the insurance enterprises shall also enjoy deduction of input VAT for the real expenses on compensations under the compensation obligation of the insurance enterprises for the VAT subject services according to the following prescriptions:

+ For the real expenses on compensations determined on the basic of VAT receipts for purchases of goods and services produced by organizations and individuals receiving compensations as ground to determine the level of compensation, the insurance enterprise shall enjoy deduction of the VAT at the percentage (%) compensation rate that the enterprise has to pay according to the written records on compensation handling; as for the VAT written on the vouchers of goods purchased and services which do not come under the compensation obligation of the insurance enterprise, the enterprise shall not enjoy input tax deduction, but the compensation receiving organization shall enjoy input VAT deduction (if it pays VAT according to the deduction method).

In this case, the insurance enterprise shall have to produce the following dossier

* VAT receipt of purchases of goods and services from the compensation receiving organizations and individuals either with the original receipt or a copy certified by the seal of compensation receiving organization.

* The written record of compensation handling made by the insurance enterprise and signed by the compensation receiving organization or individual. There must be at least two copies of the record, one to be kept by the insurance enterprise, the other supplied to the compensation receiving organization or individual as basic to

* The payment receipt of the compensation signed by the receiver of the compensation.

Example: Company A (which pays VAT according to the tax deduction method) buying insurance for automobiles at the Ho Chi Minh insurance Company City (Bao Minh) has one motorcar meeting with accident. Company

+ For the other compensations without receipts of goods purchase or service from the compensation receiving organization or individual, the insurance enterprise shall enjoy input tax deduction at the rate of 5% of the real expense to the customer without VAT vouchers on the purchase of goods and services of the compensation receiving organizations or individuals, shall not enjoy deductions according to the percentage of the real expense on compensation without voucher mentioned at this point).

+ For the input VAT compared with the real expense on compensation to the customer (according to the voucher or to the percentage), the enterprise shall have to account for the reduction of the corresponding real expense on compensation.

- For the goods and services purchased for use both in business and services, goods subject to VAT and goods not subject to VAT, deductions can be made only for the input VAT of the goods and services used for business services and goods subject to VAT. In this case the insurance enterprise shall account the input tax separately which enjoy deduction and do not enjoy deduction. If separate accounting is not possible deduction according to the percentages shall be made for the turnover subject to VAT compared with the total turnover of the enterprise.

Example: The life insurance company under the Vietnam General Insurance Corporation conducting life insurance services not subject to VAT shall not enjoy deduction of VAT of the purchased goods and services. In case the life insurance company conducts an additional number of non life insurance services subject to VAT and the turnover of these non - life insurance services accounts for 20% of the total turnover of this company but this company does not account VAT for the purchase of goods and services used for non life insurance subject to the VAT and enjoying deductions the company shall enjoy 20% of the total input VAT with VAT vouchers according to the prescribed regime.

7. Vouchers and other certificates on the purchase and sale of goods and services:

The insurance enterprises which pay the VAT according to the deduction method shall use the kind of VAT vouchers according to the prescribed regime of vouchers and other certificates.

In case the insurance company wants to use vouchers and certificates other than commonly prescribed or use insurance contracts, insurance applications and other insurance certificates instead of vouchers, they shall have to register with the Ministry of Finance (the General Taxation Department) and can use them only with written approval by the Ministry of Finance to replace vouchers), they shall have to record fully and correctly the prescribed elements and clearly record the pre-tax selling price (charge) including surcharge and extra charge outside the selling price (if any), the VAT the total paid price (including pre-tax price plus the VAT) and the amount to be paid in each period (if any).

8. Registering, declaring and paying VAT:

Insurance enterprises including the general corporation, corporations and attached branches shall conduct the registration, declaration and payment of VAT with the Taxation Departments of provinces and cities directly under the Central Government where they establish the head offices of the general corporation, corporations and In case the general corporation and corporations have branches in other provinces and cities, these branches must register, declare and pay VAT with Taxation Departments of provinces or cities where they establish their branch offices (agents and collaborators shall not have to declare and pay VAT for the insurance commissions to which they are entitled but must pay income tax as prescribed by law).

The declaration must comply with the forms of declaration attached to the declarations stipulated in Circular No.89/1998/TT-BTC. Besides, the enterprise shall have to send attached the list of expenses on compensation.

II. ENTERPRISE INCOME TAX

1. Tax payers:

According to the provisions of Article 1 and Article 3 of the Law on Enterprise Income Tax and Article 1 of Decree No. 30/1998/ND-CP of the Government of May 13, 1998 detailing the implementation of the Law on Enterprise Income Tax, insurance enterprises (primary insurance, reinsurance and insurance service constancy) engaged in insurance business and other services and goods which have taxable income shall all have to pay enterprise income tax.

2. Taxable income:

Incomes subject to the enterprise income tax comprise taxable incomes from insurance business activities, other business activities, including taxable income from production, business and service activities in foreign countries and other taxable incomes.

The turnover for calculation of taxable income is all the money to supply the insurance service and other services and goods including surcharges and extra charges that the insurance enterprise is entitled without VAT. They include:

- Turnover of insurance activities is the money that must be collected according to the vouchers and other certificates on the supply of primary insurance service, acceptance of reinsurance (after deduction of the reimbursements, reduction of charges, ceding charge of reinsurance and other deductions), reinsurance ceding, evaluation agent, compensation consideration agent, agent for claiming on the third party, agent to handle 100% compensation for goods, handling 100% compensation goods and other incomes from insurance activities.

For the insurance contracts in which it is agreed to pay in installments, the turnover for calculation of taxable income is the money to be collected in each period. In case the insurance buyer has paid in advance for many years, the turnover for calculation of taxable income is the whole money collected (similar to the example on the price for VAT calculation already mentioned above)

- The turnover from activities other than insurance activities is the interests of loans, interests from bank deposits, interest from credit bills and treasury bonds, property rents, etc., that the insurance enterprise must collect during the taxation period.

Reasonable expenses allowed for deduction to calculate taxable income for insurance business enterprises

- Expense on insurance business activities including:

+ Expense on compensation for primary insurance (after deduction of incomes from compensation for responsibility, of reinsurance ceding and income from claim against the third party).

+ Expense on compensation for acceptance of reinsurance.

+ Expense on commission for acceptance of reinsurance, commission for brokerage, agent and insurance collaborators.

+ Expenses on items for work reserve as stipulated by the Ministry of Finance.

+ Expenses on reserve on discount of goods in stocks, reserve on discount of bad debts according to the regime prescribed by the Ministry of Finance.

+ Expenses on safeguard on and limitation of losses.

+ Expenses on evaluation and handling of goods to be paid l00% compensation.

+ Expenses on paying interest to contract owners (if any).

- Expenses on activities other than insurance business activities, including expense on financial investment activities such as: expense on banking procedures charge, deduction for reserve on discount of various kinds of securities in financial operations, reserve on commitment to profit sharing for owners of contracts on life insurance activities and other expenses of investment activities.

Reasonable expenses deducted to calculate taxable income mentioned above are the real expenses and real deductions after deduction of incomes to reduce expenses such as collection of compensations in commission on reinsurance, income from claims against third parties and other items accounted for reduction of expenses according to the prescribed regime.

- Incomes from production, business and service activities of the insurance enterprises in foreign countries without subtraction of any income tax already paid in foreign countries. In case the insurance enterprise receives incomes for which it has paid income tax in foreign countries, it shall have to determine the income before paying tax in foreign countries in order to calculate the income tax when calculating income tax in Vietnam.

- Reimbursement of reserves. The reserves for the calculation of taxable incomes shall be accounted for only with regard to the difference between the balance of each reserve which has been deducted in the previous year and the balance which is to be deducted for the subsequent year according to the prescribed regime (if any).

- Other taxable incomes.

-The insurance enterprise that receives an income as its share from an enterprise in the country that accepts to contribute to the stock capital, joint venture or cooperation project (after paying tax) shall not have to pay the enterprise income tax (32% tax rate), but it must integrate this into the after-tax income to determine the additional income tax (if any).

3. Tax rate:

The tax rate of the enterprise income tax applicable to the insurance enterprises in the country is 32 % of the total taxable income (including incomes from insurance operations, other business operations and other incomes).

In case the insurance enterprise has a high income due to its objective advantages or because it invests in projects in fields, trades or localities of priority investment or taking part in foreign invested enterprises operating under the Law on Foreign Investment in Vietnam, etc., the corresponding tax rate as directed in Section V, Part B of Circular No. 99/1998/TT-BTC of July 14, 1998 of the Ministry of Finance shall apply.

4. The enterprise income tax to be paid to the State budget is determined as follows:

The deducted enterprise income tax paid in foreign countries shall not exceed the income tax calculated according to the income tax based on the Law on Enterprise Income Tax of Vietnam for the income received by the enterprise from abroad.

5. Registering, declaring and paying enterprise income tax:

Enterprises engaged in insurance business shall conduct the registration, declaration and payment of enterprise income tax according to detailed stipulations in Part C of Circular No. 99/1998/TT-BTC of July 14, 1998 of the Ministry of Finance guiding the implementation of Decree No.30/1998/ND-CP of May 13, 1998 of the Government providing details for the implementation of the Law on Enterprise Income Tax. Besides, the following should be heeded:

- All the insurance business enterprises whether they are independent accounting units, dependent accounting units or units subject to regular book entry shall have to register their enterprise income tax as well as the VAT at the local Tax Department where they establish their offices.

- Insurance enterprises with independent accounting (general corporation and the corporations) have the obligation to declare, pay and make their overall statement of their enterprise income tax with the Tax Departments of the provinces and cities directly under the Central Government where they establish their head offices (including the enterprise income tax from insurance business operations and other activities and other taxable incomes in the country and abroad of the dependent accounting units or units subject to regular book entry attached to the enterprises).

III. ORGANIZATION OF IMPLEMENTATION

1. This Circular takes effect from January 1st, 1999. Apart from the guidance provided by this Circular, the insurance business enterprises shall have to continue implementing correctly the provisions in Circular No. 89/1998/TT-BTC of June 27,1998 of the Ministry of Finance guiding the implementation of Decree No. 28/1998/ND-CP of May 11, 1998 of the Government guiding the implementation of the Law on Valued Added Tax and Circular No. 99/1998/ TT-BTC of July 14, 1998 guiding the implementation of Decree No. 30/1998/ND-CP of May l3, 1998 of the Government detailing the implementation of the Law on Enterprise Income Tax.

Besides, if the insurance enterprise which signs contracts with economic organizations and individuals in foreign countries for the supply to them of taxable goods and services in Vietnam but these organizations and individuals do not have offices or managing offices in Vietnam, the insurance enterprise has to make declaration and pay tax (including VAT and enterprise income tax) on behalf of the organizations and individuals in foreign countries before making payments to the foreign organizations and individuals according to the Circular guiding the regime of tax applied to the foreign economic organizations and individuals conducting business activities in Vietnam in forms other than investment under the Law on Foreign Investment in Vietnam.

2. In the years before 1998, the insurance enterprises already conducted accountancy accounting and determined their business results according to the real turnover in cash. Therefore, the insurance enterprises must account in their turnover in 1998, the turnovers arising in the years before 1998 when they have not yet collected money and must deduct reserves according to the prescribed regime. At the same time they must calculate and pay tax as prescribed by the Law on Turnover Tax, and the current Law on Profits. If at the close of 1998 the enterprises have not yet collected the money, they may record debts with the State budget for the turnover tax and profit tax which they have to pay and after collecting the money shall have to remit to the State budget the tax corresponding with the turnover which they have received in cash.

In the course of implementation if any unclear point or difficulty arises, the units should report in time to the Ministry of Finance (General Taxation Department) for study and settlement.