Effective period: 01 July 2025 – 31 December 2026

Vietnam’s fiscal policy over the past several years has been characterised by a careful balance between economic stimulus and long-term budget discipline. Rather than introducing sweeping structural tax reforms, the Government has relied on targeted, time-bound measures to support businesses and stimulate domestic demand during periods of economic uncertainty. One of the most prominent tools in this approach has been the temporary reduction of value-added tax (VAT).

On 01 July 2025, the Government issued Decree No. 174/2025/NĐ-CP (“Decree 174”), continuing and expanding the 2% VAT reduction previously applied under earlier decrees. Unlike earlier iterations, which were often limited to short durations and narrower scopes, Decree 174 extends the VAT reduction until 31 December 2026 and broadens the range of eligible goods and services.

This longer application period and wider scope signal a shift in policy thinking. The VAT reduction is no longer framed purely as short-term crisis relief, but rather as a medium-term demand stimulation measure designed to support recovery, stabilise consumption, and enhance business confidence. For enterprises operating in Vietnam, particularly foreign-invested companies navigating an evolving tax landscape, Decree 174 presents both opportunities and compliance considerations that merit close attention.

Economic and Policy Rationale Behind Decree 174

The issuance of Decree 174 must be understood within the broader domestic and global economic context. While Vietnam has demonstrated resilience compared to many regional peers, businesses continue to face challenges stemming from:

• Weak global demand affecting exports;
• Rising input and logistics costs;
• Tighter global financial conditions;
• Uneven recovery in domestic consumption.

Against this backdrop, VAT reduction remains one of the most direct and visible policy levers available to the Government. Unlike corporate income tax incentives, which often benefit businesses only after profits are realised, VAT reductions can immediately influence pricing, purchasing decisions, and cash flow.

By extending the VAT reduction through the end of 2026, the Government provides enterprises with a predictable planning horizon, allowing businesses to factor lower VAT costs into pricing strategies, investment decisions, and supply chain arrangements. At the same time, the selective exclusion of certain sectors reflects the Government’s intent to focus support where it is likely to generate the greatest economic multiplier effects.

Scope and Duration of the VAT Reduction

VAT rate reduction

Decree 174 provides for a 2% reduction in VAT, lowering the applicable rate from 10% to 8% for qualifying goods and services. This reduction applies only to goods and services that are otherwise subject to the standard 10% VAT rate under the VAT Law.

The decree does not alter:

• Goods and services subject to the 5% VAT rate;
• VAT-exempt goods and services;
• Special VAT calculation principles under other specialised regimes.

Effective period

One of the most notable aspects of Decree 174 is its extended validity period, running from 01 July 2025 to 31 December 2026. This is significantly longer than many previous VAT reduction measures, which were often extended incrementally for three to six months at a time.

The extended timeframe enhances policy certainty and reduces the administrative burden associated with frequent regulatory changes.

Application across business stages

The VAT reduction applies uniformly across all stages of economic activity, including:

• Importation;
• Manufacturing and processing;
• Commercial trading and distribution.

This uniform application helps avoid VAT distortions between upstream and downstream businesses and simplifies tax administration and compliance.

Excluded Goods and Services: Policy Boundaries of the VAT Reduction

Decree 174 retains a clear and detailed exclusion framework, set out in two appendices attached to the decree.

Appendix I – Sector-based exclusions

Goods and services excluded from the VAT reduction include:

• Telecommunications services;
• Financial activities and banking services;
• Securities and insurance;
• Real estate business;
• Metal products;
• Mining products, excluding coal.

These exclusions reflect the Government’s view that such sectors are either less sensitive to consumption-based stimulus, subject to separate regulatory regimes, or associated with resource management and macroeconomic stability concerns.

Appendix II – Special Consumption Tax (SCT) goods and services

Goods and services subject to Special Consumption Tax (SCT) are also excluded from the VAT reduction, with the exception of gasoline.

Importantly, the treatment of SCT goods and services is divided into two phases:

• From 01 July 2025 to 31 December 2025, based on the currently applicable SCT list;
• From 01 January 2026 to 31 December 2026, based on the SCT list under the new Law on Special Consumption Tax No. 66/2025/QH15.

This phased approach ensures alignment between VAT policy and legislative changes in excise taxation, reducing ambiguity during the transition period.

Overview of VAT Treatment Under Decree 174

VAT Calculation Methods and Applicability

A key enhancement under Decree 174 (Article 1)  is its application to both primary VAT calculation methods, ensuring broader coverage across different types of taxpayers.

Credit-invoice method

For enterprises applying the credit-invoice method:

• The reduced 8% VAT rate applies directly to eligible goods and services;
• Input VAT continues to be deductible under existing VAT rules.

This method applies to most enterprises, including foreign-invested companies, manufacturing entities, and medium-to-large service providers.

Percentage-on-revenue (direct) method

For business establishments, households, and individuals applying the percentage-on-revenue method:

• The percentage used to calculate VAT is reduced by 20%.

This mechanism ensures that smaller businesses and household enterprises also benefit from the VAT reduction, even though they do not apply the credit-invoice method.

Invoicing, Declaration, and Adjustment Requirements

Invoicing considerations

Where businesses supply multiple goods or services subject to different VAT rates, Decree 174 requires that:

• Each applicable VAT rate be clearly stated on the invoice.

This requirement is particularly relevant for businesses with diversified product offerings or bundled service arrangements.

Adjustment of previously issued invoices

If invoices have already been issued applying the 10% VAT rate or the full percentage under the direct method, businesses may:

• Adjust the invoices;
• Re-declare VAT in accordance with tax administration regulations.
• Proper supporting documentation is essential to substantiate adjustments during tax audits.

VAT declaration

Businesses must declare VAT-reduced goods and services using Form No. 01 in Appendix III, submitted together with the VAT return. This additional reporting requirement underscores the importance of accurate classification and internal controls.

Tax Implications for Enterprises Operating in Vietnam

For eligible businesses, the VAT reduction directly lowers output VAT, improving short-term liquidity and potentially enhancing competitiveness. However, it also introduces operational and compliance complexities.

Key implications include:

• Temporary mismatches between input VAT at 10% and output VAT at 8%;
• Pricing decisions that may affect margins and contractual arrangements;
• Increased risk of misclassification and audit exposure.

Enterprises must carefully assess whether VAT savings are passed on to customers or retained to offset rising operating costs.

Implications for Foreign-Invested Enterprises

Foreign-invested enterprises often face additional challenges when implementing VAT changes, particularly where pricing, invoicing, or tax positions are influenced by group-level policies.

Areas requiring particular attention include:

• Updating ERP and invoicing systems to reflect the reduced VAT rate;
• Aligning VAT treatment with transfer pricing policies;
• Reviewing contracts that reference VAT-inclusive pricing or tax gross-up clauses.

Close coordination between local finance teams and regional or global tax functions is essential to ensure consistent and compliant application.

Practical Recommendations for Businesses

To maximise benefits and minimise risks under Decree 174, enterprises should:

• Conduct a comprehensive review of goods and services against Appendices I and II;
• Update accounting and invoicing systems promptly;
• Train sales, finance, and procurement teams on VAT classification;
• Monitor official guidance issued by the Ministry of Finance;
• Maintain detailed documentation to support VAT positions.

Conclusion

Decree 174/2025/NĐ-CP represents a significant evolution in Vietnam’s use of VAT reduction as an economic policy tool. By extending the policy through the end of 2026 and expanding its scope, the Government provides businesses with meaningful relief and greater planning certainty, while maintaining clear boundaries through targeted exclusions.

For enterprises operating in Vietnam, the VAT reduction offers tangible benefits, but only where it is applied accurately and strategically. As Vietnam’s tax administration continues to modernise and enforcement becomes increasingly data-driven, proactive compliance and careful planning will be essential to fully leverage the opportunities presented by Decree 174 while avoiding unnecessary tax risks.