Guidance on Value-Added Tax, Corporate Income Tax, Personal Income Tax for Covered Warrants
Are Covered Warrants Subject to Value-Added Tax?
Based on Point 1 Official Dispatch 1468/BTC-CST in 2018 from the Ministry of Finance, the guidance is as follows:
According to the provisions at Point c, Point d, Point g Clause 8 Article 4 Circular 219/2013/TT-BTC dated December 31, 2013, of the Ministry of Finance, activities related to the offering, listing, trading, market-making, securities business, clearing, and settlement of covered warrants are not subject to value-added tax.
Guidance on value-added tax, corporate income tax, and personal income tax for covered warrants (Image from the Internet)
Guidance on Determining Corporate Income Tax for Covered Warrants
At Point 2 Official Dispatch 1468/BTC-CST in 2018 from the Ministry of Finance, the guidance on determining corporate income tax for covered warrants is as follows:
- First: For domestic enterprises.
Based on the provisions in Clause 1 Article 7 and Clause 2 Article 15 Circular 78/2014/TT-BTC implementing Decree 218/2013/ND-CP of the Government of Vietnam that stipulates and guides the implementation of the Corporate Income Tax Law, if during the tax calculation period, an enterprise (including a securities company issuing covered warrants and investors who are enterprises established and operating according to Vietnamese law) has income from covered warrants (income from investment and business activities, offering, and settling covered warrants, market-making activities, and risk management of covered warrants), this income must be declared and subject to corporate income tax at a rate of 20% as prescribed.
The increase/decrease difference due to the re-evaluation of covered warrants and underlying assets at the end of the fiscal year should not be included in income/expenses when determining taxable corporate income.
- Second: For foreign organizations producing and doing business in Vietnam not under the Investment Law, Enterprise Law (foreign contractors).
Based on the provisions in Clause 2 Article 13 Circular 103/2014/TT-BTC dated August 6, 2014, from the Ministry of Finance guiding the implementation of tax obligations applicable to foreign organizations and individuals doing business in Vietnam or earning income in Vietnam, foreign contractors earning income from the transfer of covered warrants are subject to a tax rate of 0.1% on the transfer price of securities per transaction. The method of calculating the transfer price of covered warrants per transaction is similar to the method of calculating corporate income tax as stated in Point 3 of this dispatch.
How to Determine Personal Income Tax for Covered Warrants
At Point 3 Official Dispatch 1468/BTC-CST in 2018 guidance on determining personal income tax for covered warrants:
- First: In the case before the expiration date, the investor transfers the covered warrant.
Since covered warrants are traded similarly to underlying securities, when transferring covered warrants, the income from the transfer of covered warrants will be subject to the tax for securities transfer, determined by multiplying the transfer price of covered warrants per transaction (x) by the tax rate of 0.1%. In which:
The transfer price of covered warrants per transaction is the matching price of covered warrants on the Stock Exchange multiplied (x) by the number of covered warrants.
- Second: In the case before the expiration date, the covered warrant is delisted.
The income from the transfer of covered warrants is determined by multiplying the transfer price of covered warrants per transaction (x) by the tax rate of 0.1%.
According to the provisions at Points a, b, e Clause 1 Article 9 Circular 107/2016/TT-BTC dated June 29, 2016, of the Ministry of Finance guiding the offering and trading of covered warrants, the transfer price of covered warrants is:
+ The repurchase price based on the market price of the issuing organization through market-making activities multiplied (x) by the number of covered warrants (before the delisting date takes effect); or
+ The settlement price of the covered warrant announced by the issuing organization multiplied (x) by the number of covered warrants (after the delisting date takes effect).
The settlement price of the covered warrants according to the provisions in Clause 3 Article 9 Circular 107/2016/TT-BTC.
Example 1: An investor buys 100 covered call warrants with the underlying asset being shares of Vietnam Dairy Products Joint Stock Company (VNM) at a price of VND 1,400/warrant, with a conversion ratio of 10:1, and an exercise price of VND 150,000.
- If the investor sells the covered call warrants at a price of VND 2,000/warrant, the tax payable is 2,000 x 100 x 0.1% = VND 200.
- If the covered warrant is delisted and the issuing organization announces a settlement price of VND 2,000/warrant, the tax payable is 2,000 x 100 x 0.1% = VND 200.
- Third: At the time the investor exercises the rights.
Since current regulations only stipulate cash settlement, the taxable income arises at the time the investor exercises the rights. At the time of cash settlement, the investor's income is subject to a tax rate of 0.1% on the transfer price of covered warrants per transaction. The transfer price of covered warrants per transaction is determined by multiplying the settlement price of the underlying securities (x) (the number of covered warrants divided by the conversion ratio).
The settlement price of the underlying securities is announced by the Stock Exchange according to the provisions of Article 14 Circular No. 107/2016/TT-BTC.
Example 2: Corresponding to the assumptions in Example 1 above, the settlement price of the underlying asset (VNM) announced by the Stock Exchange at the time of exercising the rights is VND 155,000/share.
The tax payable when the investor exercises the rights is:
155,000 x (100 : 10) x 0.1% = VND 1,550
What Are the Regulations on the Timing for Determining Taxable Income and Tax Withholding?
Based on Point 4 Official Dispatch 1468/BTC-CST in 2018, the timing for determining taxable income is guided as follows:
- For securities companies issuing covered warrants
The timing for determining taxable income is the time of issuing the covered warrant, the time the covered warrant is delisted, or the time of exercising the rights.
- For investors (including organizations and individuals)
The timing for determining taxable income is the time the investor transfers the covered warrant on the Stock Exchange system or the time the covered warrant is delisted or the time the investor exercises the rights.
Additionally, at Point 5 Official Dispatch 1468/BTC-CST in 2018, the guidance on tax withholding is as follows:
Securities companies, depository banks where individuals and foreign contractors open depository accounts are responsible for withholding tax as guided in Points 2b, and 3 of this dispatch before paying the individuals and foreign contractors.
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