Depreciation costs are deductible, aren’t they?

(VNS-3/01/07)In the interests of creating an equitable and transparent legal environment for investment, the National Assembly has passed a raft of laws and the Government has adopted a ream of regulations in an effort to erase discrepancies in the law.

But, at the same time, some ministries and agencies seem to have been working at cross purposes, issuing regulations that create further inequities in the law.

The law on the deductibility of depreciation costs from taxable income is a case in point.

Article 5 of Decree No 164.2003/ND-CP, dated December 22, 2003, detailing and guiding the implementation of the Law on Corporate Income Tax, provides that reasonable business expenses which may be deducted from taxable income includes depreciation of fixed assets used in production or trade in goods and services. The rate of the depreciation of fixed assets would be based on the value of the assets and the period over which the depreciation expenses were deducted.

Businesses which are solvent and produce or trade goods and services would be entitled to accelerate depreciation at a maximum rate not to exceed twice the normal level of depreciation in order to renew technology.

Likewise, enterprises owning construction they are in the process of building under lawful construction permits and therefore, would be entitled to deduct depreciation of such construction works from their taxable corporate income.

But, Decree No 95/2005/ND-CP, dated July 15, 2005 and taking effect on August 10 of that year, on the grant of home ownership or construction work ownership certificates, provides that individuals and organisations investing in lawful construction works shall not be required to apply for certificates for such construction works.

Official Letter No 3238/TCT-PCCS of September 19, 2005, of the General Department of Taxation addressed to the Khanh Hoa Department of Taxation, for purpose of deducting depreciation of fixed assets from taxable income, stated that enterprises would be required to show invoices attached to construction contracts and liquidation and finalisation of construction value in order to deduct depreciation expenses. There is no mention of a requirement of a construction work certificate.

However, Official Letter No 4268/TCT-TS of November 15, 2006, of the General Department of Taxation addressed to Dong Nai Department of Taxation, provided expressly that enterprises could not deduct depreciation of fixed assets related to a construction work for which a construction work certificate had not been granted. The letter stated that taxable income had to be calculated in accordance with Section 1.1, Item III, part B, of Circular No 128/2003/TT-BTC dated December 22, 2003, of the Ministry of Finance detailing Decree No 164/2003/ND-CP dated December 22, 2003 of the Government, detailing the Law on Corporate Income Tax.

In short, two letters of the General Department of Taxation regarding similar cases are seemingly at odds with each other and with Government regulations as to whether certification of a construction work is a prerequisite for an enterprise to deduct depreciation costs.

No legal instrument such as a circular or decree expressly states whether a construction work certificate is required for an enterprise to deduct depreciation costs related to that construction work for the purpose of calculating taxable income.

Circular 128 should be amended accordingly, preferably to make it clear that certification of the construction work is not essential to prove deductible depreciation expenses for tax purposes.