VAT deduction method

The VAT deduction method is a core element in accounting and tax cost management for all businesses in Vietnam. In line with this principle... VAT Law 2024 together Decree 181/2025/ND-CP Effective from July 1, 2025, mastering the deduction mechanism helps businesses optimize cash flow and comply with legal regulations. Auditing practice shows that many entities face the risk of miscalculating expenses simply because they misunderstand the input deduction rules.

According to the current tax legal system, determining tax obligations is not simply a matter of mechanically comparing output and input. Businesses need to accurately analyze the nature of each transaction, the taxable entity, and the required payment method. This article from the MAN – Master Accountant Network team of experts will comprehensively analyze the regulations, principles, and risk management techniques when implementing value-added tax deductions.

What is the VAT deduction method? Concept and legal nature.

According to the 2024 Value Added Tax Law, value added tax is an indirect tax calculated on the added value of goods and services generated during the process from production and distribution to consumption.

VAT deduction is essentially a backward deduction mechanism. Businesses act as tax collection agents for the State. When collecting... VAT From the buyer (output), the business is entitled to refund the VAT paid to the supplier (input).

What is input VAT?

Input VAT is the amount of VAT recorded on VAT invoice Purchases of goods, services, fixed assets, or VAT payment documents for import tax, or tax payment documents on behalf of foreign parties.

What is output VAT?

Output VAT is the total VAT amount on goods and services sold, as recorded on the VAT invoices issued by businesses to their customers.

The economic nature of the deduction mechanism

The nature of VAT is that it is levied on the final consumer. The application of a deduction mechanism aims to eliminate the phenomenon of double taxation.

For example, without a deduction mechanism, VAT would be calculated on top of the value already taxed at the previous stage. This would unreasonably increase the selling price and distort production and business operations.

The role of VAT deduction methods in corporate financial management.

The application of the deduction mechanism brings many practical benefits to the financial management and risk control of businesses.

• Transparency in accounting records: Applying the deduction mechanism requires businesses to separately account for the tax portion and the cost portion that makes up the cost of goods sold. This forces the accounting department to closely monitor invoices and supporting documents.

• Optimizing business cash flow: Businesses are not required to include input VAT in the cost of goods sold (except in cases where it is not deductible). This allows for more competitive pricing and prevents businesses from tying up capital already paid in input taxes.

• Minimizing risks during tax settlement: By correctly applying deduction rules right from the invoice generation stage, businesses will be proactive during tax audits. Businesses will minimize the risk of being subject to back taxes and administrative penalties.

Subjects to whom the VAT deduction method applies according to the latest regulations.

Based on Clause 2, Article 11 of the 2024 Value Added Tax Law and Article 21 of Decree 181/2025/ND-CP, the applicable subjects are production and business establishments that fully comply with accounting, invoicing, and documentation regulations as prescribed by law.

Businesses that have reached the prescribed revenue threshold.

Businesses and cooperatives with annual revenue from the sale of goods and provision of services subject to VAT of 1 billion VND or more.

Businesses that register voluntarily apply

The following entities, even if they have not reached the revenue threshold of 1 billion VND, are still eligible to register for the deduction mechanism:

• Businesses and cooperatives currently in operation with annual revenue under 1 billion VND.
• Newly established businesses resulting from investment projects of existing businesses pay taxes using the deduction method.
• Newly established businesses that make investments according to investment projects approved by competent authorities are eligible for voluntary registration.
• Newly established enterprises, cooperatives, and cooperative unions with investment projects must have investment plans approved by the competent authority of the enterprise.
• Newly established enterprises and cooperatives that make investments, purchases, or receive capital contributions in the form of fixed assets, machinery, equipment, tools, or have lease agreements for business premises.
• Other economic organizations include economic organizations of political and social organizations, and public service units that maintain complete accounting records and can determine input and output taxes.

Cases involving foreign contractors and organizations.

• Foreign organizations and individuals doing business in Vietnam are required to pay contractor tax, including VAT, according to the contractor and subcontractor contracts.
• Foreign organizations and individuals providing goods and services for the purpose of conducting oil and gas exploration, development, and exploitation activities are required to declare and pay taxes on behalf of the Vietnamese party.

Newly established branch

Newly established branches of businesses or those established from investment projects of businesses that are paying withholding tax, if the branch is required to file its own VAT return, will also apply the withholding mechanism.

Important Note: Household businesses and individual business owners are not subject to the VAT deduction method.

How to determine the amount of VAT payable using the VAT deduction method.

The formula for determining the VAT payable during a tax period is specifically stipulated as follows:

VAT payable = Output VAT – Input VAT eligible for deduction

How to calculate output VAT

Output VAT is equal to the total VAT on goods and services sold as recorded on the VAT invoice.

The VAT amount stated on the invoice is determined by:

Output VAT amount = Taxable price of goods and services sold * Corresponding VAT rate

In cases where the payment document shows the price including VAT, the taxable price is determined as follows:

Taxable price = Payment price / (1 + VAT rate)

How to calculate deductible input VAT

The amount of input VAT that can be deducted is equal to the total VAT amount recorded on VAT invoices for the purchase of goods, services, and fixed assets; VAT payment documents for imported goods; and VAT payment documents on behalf of foreign parties that fully meet the conditions for deduction as stipulated by law.

Detailed principles for deducting input VAT according to current regulations.

According to Article 14 of the 2024 Value Added Tax Law and Article 23 of Decree 181/2025/ND-CP, the deduction principle is divided into a group of general principles and a group of specific cases.

General principle of deduction

• For use in taxable activities: Input VAT on goods and services used in the production and business of goods and services subject to VAT is fully deductible.
• For use in both taxable and non-taxable activities: Businesses must separately account for deductible and non-deductible input VAT.
• Allocation formula when separate accounting is not possible:

The VAT deduction rate = (Revenue subject to VAT + Revenue not subject to VAT declaration and payment) / Total revenue from goods and services sold.

Monthly or quarterly, businesses provisionally allocate the deductible input VAT. At the end of the year, businesses recalculate the allocation for the entire year to declare adjustments to the provisionally allocated amount.

Cases of pardons are fully deductible:

• Goods and services sold to organizations and individuals using humanitarian aid and non-refundable grants.
• Goods and services used in the exploration and development of oil and gas fields.
• Goods (whether purchased or produced domestically) used for giving away, gifting, promoting, or advertising purposes to support production and business activities are subject to tax.

Amount of tax payable according to the Customs tax assessment decision: The entire amount is deductible, except for the value resulting from penalties imposed by customs authorities for fraud or tax evasion.

Deduction declaration at Project Management Board and Branches:

• If a business assigns a Project Management Board or branch to directly manage an investment project and declare VAT for the investment project, and the business entity makes payments for certain expenses on behalf of the investor, then the Project Management Board or branch is entitled to deduct the VAT based on VAT invoices issued in the business's name.
• Businesses are not allowed to claim double deductions for VAT invoices that have already been declared and deducted by the Project Management Board or branch.

Change the tax calculation method:

• From direct to deduction: Value Added Tax (VAT) on purchased goods and services can be deducted starting from the first period declared using the deduction method.
• From deduction to direct: Uncredited VAT at the last period is included in deductible expenses or in the cost basis of fixed assets when calculating corporate income tax (except for invoices of 5 million VND or more without non-cash payment documentation).

Changing from a non-taxable to a taxable item: Goods and services that are transferred from being exempt from VAT to being subject to VAT will be eligible for input VAT declaration and deduction from July 1, 2025.

Fixed assets that are not eligible for input VAT deduction:

• Fixed assets and specialized machinery used in the production of defense and security products.
• Fixed assets of credit institutions, reinsurance companies, life insurance companies, securities businesses, medical examination and treatment facilities, and training institutions.
• Helicopters, airplanes, civilian gliders, and yachts not used for commercial purposes such as transporting goods, passengers, tourism, or hotels.
• This decision not to deduct applies to both rental and repair costs for the aforementioned assets.

Subsidiary units are not taxpayers: The head office of a corporation or group that does not directly engage in business activities, and its affiliated administrative and public service units (hospitals, clinics, schools) that are not VAT taxpayers, are not entitled to deduct input VAT.

Principles of VAT deduction in certain specific cases

Goods and services provided to workers:

• The VAT on fixed assets, housing, and medical stations built in industrial zones to serve workers is fully deductible.
• Rent, construction costs, or the cost of purchasing housing outside industrial zones for workers employed in the industrial zone (provided it meets design standards) are deductible.

Rent for foreign professionals:

• Not deductible: If the expert receives a salary in Vietnam under an employment contract signed with a business establishment in Vietnam.
• Deductible: If the expert is an employee of a foreign company sent to work in Vietnam, the foreign company pays their salary, and the contract clearly states that the Vietnamese company covers their accommodation costs.

Contributing capital in the form of assets: Newly purchased, unused assets with valid invoices can be contributed as capital. The value of the capital contribution is determined by the price stated on the invoice, including VAT. The recipient of the capital contribution is entitled to deduct the VAT stated on the contributor's invoice.

Goods and services purchased through authorization:

• Insurance companies authorize policyholders to repair property: They are entitled to deduct the corresponding VAT amount based on the invoice issued in the policyholder's name (compensation of 5 million VND or more must be paid non-cash).
• The founder authorizes an organization or individual to pay the business establishment costs on their behalf: Input VAT is deductible based on invoices in the name of the authorized person, and payment must be made non-cash to the authorized person for invoices of 5 million VND or more.

Cars with 9 seats or fewer: For passenger cars with 9 seats or fewer (excluding vehicles used for transportation, tourism, and hotel businesses) valued at over 1.6 billion VND, only the VAT amount corresponding to the value of 1.6 billion VND or less can be deducted.

Closed-loop production facility: Businesses with a closed-loop production system and centralized accounting that use products not subject to VAT throughout their production processes to manufacture goods subject to VAT are entitled to deduct the entire input VAT.

Cashless payments: This applies only to invoices for individual purchases with a value of 5 million VND or more (including VAT) to be eligible for deduction.

The legal framework governing the method of VAT deduction.

To accurately find information on value-added tax regulations, accountants and managers should refer to the following legal documents:

Summary of legal documents regulating the method of VAT deduction.

Legal documents	Date of issuance	Main content summary
VAT Law 2024	29/11/2024	The legal framework stipulates the taxable subjects, tax base, tax rates, applicable subjects, and conditions for VAT deduction.
Decree 181/2025/ND-CP	01/07/2025	Detailed guidance on the implementation of the 2024 Value Added Tax Law, specifying allocation ratios, special cases, and deduction procedures.
Tax Administration Law 2019	13/06/2019	Regulations concerning tax declaration procedures, deadlines for submitting tax returns, tax assessment, and administrative penalties for tax violations.

Practical Case Study: Cost Management and VAT Deduction in a Manufacturing Enterprise

To help businesses clearly understand how to apply this, experts at MAN – Master Accountant Network would like to share a real-life case study they helped resolve for a client.

Business situation

Tan Binh Production Joint Stock Company (in Ho Chi Minh City) deals in two groups of products:

1. Specialized medical equipment (exempt from VAT).
2. Home medical devices (subject to VAT 10%).

In the third quarter of 2025, the company had the following figures recorded in its books:

• Revenue from the sale of medical equipment: 6 billion VND.
• Revenue from the sale of home medical devices: 4 billion VND.
• Total input VAT on the purchase of goods and assets used jointly and not separately accounted for: 200 million VND.
• Purchased one 5-seater car for the Board of Directors, valued at 2.2 billion VND (excluding tax), with VAT recorded on the invoice as 220 million VND.

Analysis and handling from MAN

From MAN's perspective, the accountant at Tan Binh company made two common mistakes: declaring a deduction for input tax under code 100% and declaring the full VAT for the 5-seater car.

Step 1: Allocate common input VAT

Total revenue for the period = 6 billion + 4 billion = 10 billion VND.

The VAT taxable revenue ratio = 4 billion / 10 billion = 40%.

The amount of VAT used for general purposes that can be deducted = 200 million * 40% = 80 million VND.

Non-deductible VAT amount = 200 million - 80 million = 120 million VND (This portion is included in deductible expenses when calculating corporate income tax).

Step 2: Processing VAT for 5-seater cars

Since the 5-seater car is valued at 2.2 billion VND (exceeding the 1.6 billion VND threshold), the maximum input VAT that can be deducted is:

The VAT amount corresponding to the threshold of 1.6 billion VND = 1.6 billion * 10% = 160 million VND.

Since this vehicle serves as the general management tool for both taxable and non-taxable operations, the tax amount of 160 million VND will be further allocated according to the 40% ratio:

The actual VAT amount deductible for the car = 160 million * 40% = 64 million VND.

The remaining VAT amount = 220 million - 64 million = 156 million VND is not deductible and should be accounted for in the original cost of fixed assets or expenses.

The results obtained:

Thanks to timely intervention and advice from MAN – Master Accountant Network, Tan Binh Company was able to correct its Q3/2025 VAT tax return to comply with regulations. The company avoided penalties and late payment fees totaling over 180 million VND when the tax authorities conducted a subsequent audit.

Comparison of the VAT deduction method and the direct method.

To choose the optimal declaration method, managers need to understand the differences between the two current methods of calculating VAT.

Comparison table of VAT deduction method and direct method.

Comparison criteria	VAT deduction method	Direct calculation method
Tax basis	Output VAT minus input VAT is deductible.	The ratio % multiplied by revenue or value added.
Use invoices	Use Value Added Tax (VAT) invoices.	Use a sales invoice.
Required subjects	Businesses with annual revenue of 1 billion VND or more.	Households, individual businesses; and enterprises with revenue under 1 billion VND do not voluntarily register.
Document management	Non-cash payment documents of 5 million VND or more are required.	Bank payment documents are not required for deduction purposes.
Cash flow impact	Take advantage of large input taxes when investing in assets and machinery.	Taxes are calculated directly on revenue and cannot be deducted from purchase tax.

Expert opinion: 5 common risks when applying the VAT deduction method and solutions from MAN.

With over 30 years of experience in auditing and tax consulting in Vietnam, experts at MAN have identified five common risk blind spots that businesses frequently encounter.

• Risks from invoices issued by businesses that have temporarily ceased operations or abandoned their business address: Many businesses claim input tax deductions, but then the tax authorities notify them that the supplier has ceased operations. Upon inspection, the tax authorities will disallow this input tax if the business cannot prove the transaction was genuine.
• Non-compliance with cashless payment regulations: The new regulations limit cashless payments on invoices with a value of 5 million VND or more (including VAT) apply. Cash payments for these invoices result in the entire amount of input VAT being disallowed.
• Forgetting to allocate the general VAT to non-taxable revenue: Businesses that trade in both taxable and non-taxable goods often skip the step of allocating the common VAT at the end of the year. This leads to the false declaration of deductible input tax.
• Incorrect VAT declaration for passenger cars with fewer than 9 seats exceeding a value of 1.6 billion VND: The accountant deducted the entire tax amount on the invoice for a newly purchased car, forgetting to set the ceiling of 1.6 billion VND, leading to tax arrears and late payment penalties.
• Errors in declaring invoices for authorized payments and pre-establishment expenses: The lack of a power of attorney, payment documents with incorrect names of the authorized person, or cash payments exceeding 5 million VND will result in the loss of the business's right to deduct VAT.

Risk optimization solutions from MAN – Master Accountant Network

To thoroughly address these risks, MAN's solution offers a comprehensive approach. Our team of experts with over 30 years of experience will periodically review your invoicing system, establish automated input control processes, and accurately allocate taxes according to each business type. MAN helps businesses build a strong legal shield against any tax audit.

Conclude

Mastering and correctly implementing the VAT deduction method not only helps businesses comply with tax laws but also serves as an effective financial management tool. The deduction mechanism requires absolute accuracy in revenue classification, input invoice accounting, and adherence to payment terms. Any small error in declaration can lead to significant penalties and back taxes when audited by the tax authorities.

Tax services at MAN – Master Accountant Network

• Tax accounting services
• Tax consulting services
• Tax settlement services
• Tax reporting services
• VAT refund service

Service contact information at MAN – Master Accountant Network

• Address: No. 19A, Street 43, Tan Thuan Ward, Ho Chi Minh City
• Mobile/Zalo: 0903 963 163 – 0903 428 622
• E-mail: man@man.net.vn
• Google Business Profile: View MAN – Master Accountant Network's Google Business Profile 
• LinkedIn Founder: View expert Le Hoang Tuyen's LinkedIn profile. 

Responsible for production and professional content review by: Mr. Le Hoang Tuyen – Founder & CEO of MAN – Master Accountant Network, CPA Vietnam with over 30 years of experience in accounting, auditing, taxation, and corporate financial consulting.

FAQ: Frequently Asked Questions about VAT Deduction Methods

Can invoices that have been forgotten and not yet declared be deductible?

Businesses are allowed to declare and deduct additional input VAT before the tax authorities or competent agencies announce a tax audit or inspection decision at the taxpayer's premises.

Can newly established businesses immediately apply the deduction method?

Yes. Newly established businesses with investment projects or those that have made investments, purchased or received capital contributions in the form of fixed assets, machinery, or have lease agreements for business premises are eligible to voluntarily register to apply the deduction method.

What is the minimum invoice value for mandatory bank transfer?

According to current regulations, invoices for goods and services purchased individually with a value of 5 million VND or more (including VAT) must be supported by non-cash payment documents in order to be eligible for input tax deduction.

Are goods purchased that are damaged due to natural disasters eligible for VAT deduction?

Input VAT on goods lost due to natural disasters, fires, epidemics, or uncompensated losses is still fully deductible.

Is a 5-seater passenger car worth 3 billion VND used for tourism business subject to a deduction limit of 1.6 billion VND?

No. In the case of cars used for commercial purposes such as transporting goods and passengers, tourism, or hotels, the input VAT is fully deductible based on the actual value of the vehicle, without the 1.6 billion VND limit.