In most VAT/GST jurisdictions Interest income is VAT exempt. However, since early 2012, the relevant provisions of new VAT Circular have excluded interest income generated by non-credit institutions from the VAT exemption lists.
Further, the Government in Letter 608/VPCP-KTTH dated 4 February 2012, addresses that interest income generated by non-credit institutions is VATable as the Government does not encourage non-credit institutions to engage in and generate income from such credit activities.
Accordingly, from 1 March 2012 (the effective date of new Circular 06/2012/TT-BTC on VAT) certain local tax departments have requested VAT to be charged on the interest income earned by non-credit institution earners, including those who are foreign contractors (offshore loans). As provided by local tax departments, applicable VAT rate on interest income for onshore loan is 10% and the deemed withholding-VAT rate on interest income is 5%.
However, recently, certain competent ministries proposed that interest should be VAT exempt, generated by credit or non-credit institutions. The Government, with the issuance of 1551/TTg-KTTH (“Letter 1551”) on 26 September 2012 tends to accept the proposal on VAT exempt for interest income, without any distinction on the income earners.
For further guidance the implementation of the Letter 1551, on 11 December 2012, the Ministry of Finance issued Official Letter 17146/BTC-TCT to all local tax departments addressing that interest income generated by non-credit institution organizations or individuals from loans which are not legally prohibited is NOT subject to VAT.
The Letter does not however provide guidance on the tax treatment of cases where the VAT has been charged. Particularly for the cases where the interest payers were unable to claim input VAT (charged by the lenders), i.e. it is unclear whether a VAT refund is allowed for such cases.
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