Question: Company A has regulations on paying house rent allowance to employees. Company A rents a house from the landlord, individual X, and pays the rent directly to individual X via bank transfer. The house rental contract stipulates that the rent excluding tax is 200 million/year. The contract does not clearly state which party is responsible for declaring and paying tax, so currently there are no documents for declaring and paying house rent tax.

Question:

1. Personal income tax of employees: Is the taxable income from this house rent calculated by the employee as 200 million VND or calculated at a minimum level between 200 million VND and 15% of taxable income?

2. If the contract does not clearly state which party is responsible for declaring and paying tax as above, then the tax responsibility belongs to company A or individual X, and can Company A consider this expense as a deductible expense when calculating corporate income tax?

Answer:

* Pursuant to the guidance in Article 2 of Circular 111/2013/TT-BTC of the Ministry of Finance, amended and supplemented by Article 11 of Circular No. 92/2015/TT-BTC dated June 15, 2015:

"... The amount of house rent, electricity and water and accompanying services (if any) for housing paid by the employer shall be included in taxable income according to the actual amount paid but shall not exceed 15% of the total taxable income (excluding house rent) at the employer, regardless of the place of income payment".

Clause 4, Article 7 of Circular No. 111/2013/TT-BTC mentioned above also stipulates as follows:

"4. Converting tax-exclusive income into taxable income

In case organizations and individuals pay income from salaries and wages to employees according to the guidance in Clause 2, Article 2 of this Circular excluding tax, they must convert tax-exclusive income into taxable income according to Appendix No. 02/PL-TNCN issued with this Circular to determine taxable income. Specifically, as follows:

a) Income used as the basis for conversion into taxable income is the actual income received plus ( ) benefits paid by the employer on behalf of the employee (if any) minus (-) deductions. In case the payments on behalf include house rent, the house rent is included in the income used as the basis for conversion by the actual amount paid but not exceeding 15% of the total taxable income at the unit (excluding house rent)".

For the specific case of an individual, it is determined as follows:

- The company pays the house rent on behalf of the individual and is subject to personal income tax = 200,000,000 VND / 12 months = 16,666,666 VND / month.

The individual determines the maximum house rent to be included in taxable income as 15% of the total taxable income (excluding house rent) to compare with the actual house rent paid by the company on behalf of the individual:

Total income (salary + other taxable income paid by the company, excluding house rent) x 15% = abx / month.

If abx <16,666,666, then the taxable income is calculated as abx.

If abx > 16,666,666, then the average actual monthly house rent of 16,666,666 VND is included in taxable income.

* At Point 2.5 Clause 2 Article 4 Circular 96/2015/TT-BTC stipulates on the cost of renting assets of individuals without complete records and documents as follows:

“2. Expenses that are not deductible when determining taxable income include:

...

2.5. Expenses for renting assets of individuals without complete records and documents below:

- In case an enterprise rents assets of an individual, the documents to determine deductible expenses are the asset lease contract and the asset lease payment documents.

- In case an enterprise rents assets of an individual and the asset lease contract has an agreement that the enterprise pays tax on behalf of the individual, the documents to determine deductible expenses are the asset lease contract, the asset lease payment documents and the tax payment documents on behalf of the individual.

- In case an enterprise leases assets from an individual and the lease contract stipulates that the asset rental does not include tax (value added tax, personal income tax) and the enterprise pays tax on behalf of the individual, the enterprise is allowed to include in deductible expenses the total asset rental amount, including the tax paid on behalf of the individual.”

Accordingly, in principle, if an enterprise leases assets from an individual and the contract does not stipulate authorization to pay tax on the house rental for the lessee, the responsibility to fulfill the tax obligation for the house rental shall be borne by the lessor. Only when the contract between the lessor and the lessee specifically agrees that the lessee is responsible for fulfilling the tax obligation for the rent, will the lessee be allowed to account for the corporate income tax expense on the house rental for the tax paid on behalf of the lessor.