Methods for determining taxable income

In order to calculate the payable enterprise income tax, the accountant must define the taxable income.

Article 2, Circular No.96/2015/TT-BTC prescribes that the taxable income in a tax period includes income from the production and trading of goods and provision of services and other incomes.

Taxable income in a tax period shall be determined as follows:

Taxable income = (Turnover - Deductible expenses) + Other incomes

Accordingly, in order to determine the taxable income, the enterprise must define the information as follows: (1) Turnover, (2) Deductible expenses and (3) Other incomes, in particulars:

(1) Turnover

Pursuant to the Article 5, Circular No. 78/2014/TT-BTC, turnover for calculating taxable income shall be determined as follow:

The turnover for calculating taxable income is the total proceeds from the sale of goods, remuneration for processing and charges for provided services, including price subsidies, surcharges and extra fees that an enterprise may earn, regardless of whether or not these amounts have been collected.

For enterprises declaring and paying value-added tax by the method of calculation of tax based directly on added value, turnover used for calculating enterprise income tax is inclusive of value-added tax.

Example 1: For enterprises paying value-added tax by the credit method, the turnover is exclusive of value-added tax. The added-value invoice contains the following items:

Selling price:  VND 100,000.

VAT (10%): VND 10,000.

Payment price: VND 110,000.

The turnover for calculating taxable income is VND 100,000.

- For enterprises paying value-added tax by the method of calculation directly based on added value, the turnover is inclusive of value-added tax.

Example 2: Enterprise B is liable to pay value-added tax by the method of calculation directly based on added value. The sale invoice only indicates the selling price of VND 110,000 (VAT-inclusive price).

The turnover for calculating taxable income is VND 110,000.

- For enterprises providing services for which customers pay charges in advance for many years, the turnover for calculating taxable income shall be distributed to the number of years of advance payment or determined according to the lump-sum payment.

- If such enterprises are enjoying tax incentives, the tax incentives shall be determined based on the total payable enterprise income tax of the years of advance payment (:) divided by the number of years of advance payment.
 

* Some notes on turnover

- Income from the production and trading of goods and provision of services is the turnover from these activities minus deductible expenses for these activities.

An enterprise that has different production and trading activities subject to different tax rates shall separately calculate the income from each activity and multiply it by the corresponding tax rate

- Income from the transfer of real estate or investment projects; income from the transfer of the right to participate in investment projects or the right to explore, exploit and process minerals as prescribed by law shall be separately accounted for to declare and pay enterprise income tax at the rate of 20%.

These incomes are ineligible for enterprise income tax incentives (except incomes of enterprises from implementing investment projects on construction of social houses for sale, lease, or lease-purchase which enjoy the enterprise income tax rate of 10%.

In a tax period, if an enterprise engaged in the transfer of the real estate, investment projects, or the right to participate in investment projects may offset this loss against the profit from its production and business activities (including also other incomes prescribed in Article 7 of this Circular). For the losses from the transfer of the real estate, transfer of investment projects, or transfer of the right to participate in investment projects and previous years which are still in the loss-carry forward duration.

- For an enterprise carrying out dissolution procedures, after obtaining the dissolution decision, if it transfers real estate being fixed assets, the income (profit) (if any) from this transfer may be used to offset the loss from its production and business activities (including also the losses carried forward from previous years under regulations) in the tax period when such real estate transfer is made. 

(2) Deductible expenses

Pursuant to Article 1, Circular No. 96/2015/TT-BTC, enterprises are deducted from the expenses if satisfying all the conditions as follows:

Condition 1: Actual expenses arising in relation to production and business activities of enterprises.

Condition 2: Expenses with adequate lawful invoices and documents as required by law;

Condition 3: Expenses for purchase of goods or services valued at VND 20 million or more (VAT-inclusive prices) per invoice with non-cash payment documents.

Therefore, enterprises are deducted all the expenses if the actual expenses arising in relation to production and business activities and have adequate lawful invoices and documents as required by law;

(3) Other incomes

Pursuant to Article 7, Circular No. 78/2014/TT-BTC (a number of provisions are amended and supplemented by Circular No. 96/2015/TT-BTC and Circular No. 151/2014/TT-BTC), other incomes include:

- Income from the transfer of capital or securities as guided in Chapter
IV of the Circular 78/2014

-  Income from the transfer of real estate as guided in Chapter V of this Circular, in particulars:

+ Incomes from real estate transfer include income from the transfer of land use rights, or land lease right (including also the transfer of projects associated with the transfer of land use rights or land lease right in accordance with law).

+ Income from the sublease of land of real estate enterprises in accordance with the land law regardless of whether there is an infrastructure facility or architectural work attached to land;

+ Income from the transfer of houses or construction works attached to land, including their appurtenances, in case the value of such appurtenances is inseparable upon the transfer, regardless of whether land use rights or land lease right are/is transferred; and income from the transfer of house ownership or use right.

Here are the methods for determining taxable incomes.