The collection of value added tax (VAT) subject to those operations involving letters of credit, or LCs, despite causing headaches among local banks and businesses, is consistent with international practice, according to the General Department of Taxation.

Vietnam’s top taxman recently requested its local tax departments instruct credit institutions on procedures for value added tax declaration and payment related to LCs.

Many institutions reportedly raised concern whether the request is in keeping with international practice.

In response to their concern, the department cited the 2010 Law on Credit Institutions as saying that as a payment mechanism, L/Cs are subject to VAT, prompting the request.

The taxman added all the proceeds from L/C operations with and without guarantee commitments are subject to VAT since the law took effect on January 1, 2011.

Nguyen Van Phung, director of the Department of Tax Administration at Large Enterprises, told Customs News that those operations related to credits, loans and guarantees are legally beyond the scope of VAT. The regulation has been in place since 1997.

Since the introduction of the 2010 Law on Credit Institutions, L/Cs have been regarded as a provision of services of via-account payment, said the director.

He said with regards to the Law on VAT, an L/C is neither a credit guarantee nor a loan, so it will be subject to VAT.

In case the L/C includes a compulsory loan operation, banks should be responsible for making a separate account and excluding its proceeds from the VAT scope.

Credit institutions and businesses have recently voiced concerns that they might be forced to pay tax arrears.

In this case, Phong claimed these organisations have long failed to differentiate between two aspects of L/Cs, namely credits and payments, so they have wrongly listed the proceeds from L/Cs as a type of revenue not subject to VAT.

According to the director, the country’s taxman suggested local tax departments and credit institutions work together to divide the proceeds from L/Cs into two groups.

The first group includes L/Cs with compulsory loan operations while the other group involves those L/Cs with details about accounts, receipts and cash transactions.

“So far, our tax sector has yet to impose fines on any case, and has been working with authorised State agencies so that all relevant agencies are complying with laws and in line with economic nature,” Phung said.