INTERVIEW: Vietnamese RECs face tax uncertainty in 2025

Vietnam's Renewable Energy Certificates (REC) face uncertainty over the tax rates in 2025 as the current Value Added Tax (VAT) rate of 8% will expire on Dec. 31, James Pham, managing partner at VSE Lawyers told S&P Global Commodity Insights.

"After Dec. 31, 2024, there are no specific regulations on whether the 8% tax rate will continue or revert to 10%. Therefore, businesses need to closely monitor developments and await further guidance from relevant authorities," Pham said in an interview.

Vietnam clarified on Oct. 23, 2023 that RECs are not categorized as Carbon Credits or Greenhouse Gas Emission Credits and would therefore fall under applicable VAT regulations. Subsequently, the General Department of Taxation reduced VAT applied to RECs to 8% from July 1, 2024, to Dec. 31, 2024, as part of the government's VAT reduction package outlined in Decree 72/2024/ND-CP.

"While carbon credits and GHG emissions credits are exempt from VAT declaration and payment, transactions involving RECs and other voluntary credits do not benefit from this VAT exemption," Pham said.

VAT challenges on REC market

The imposition of VAT presents significant challenges for the REC market. Several international REC markets exempt REC transactions from tax, which may reduce the attractiveness of the Vietnamese market to foreign investors who prefer markets with low transaction costs and favorable tax policies.

Additionally, Pham cautions that small and medium enterprises may struggle under the new tax policy due to their limited capacity to absorb tax costs. "This could lead to market polarization, where only financially robust businesses can actively engage in REC trading, while smaller players may find themselves sidelined or compelled to limit their participation," he said.

Regarding tax obligations, Pham clarified that the responsibility for VAT will be shared among sellers, issuers, and traders in the REC transaction chain. "End-users do not directly declare and pay VAT; instead, they bear this tax through the purchase price that includes VAT. It is crucial for end-users to obtain valid VAT invoices from sellers for tax declaration purposes and to claim input VAT deductions if they meet regulatory requirements," he added.

Market adaptations and future prospects

However, despite the challenges, Pham noted that the introduction of VAT regulations not only clarifies tax obligations but also lays a stronger legal foundation for REC trading, thereby enhancing market transparency in Vietnam.

"The systematization of invoices and tax documents will enable state management agencies to better monitor and supervise market transactions. This, in turn, fosters confidence among investors and businesses participating in the market, which is vital as Vietnam's REC market is still in its nascent stages and requires a reliable trading system," he added.

In response to these changes, Pham anticipates that renewable energy producers will need to revise their business strategies to align with the new tax framework.

"Businesses are actively exploring solutions to optimize costs, including restructuring REC transactions and enhancing operational efficiency to remain competitive in the market," he explained.

He also believes that the future development of Vietnam's REC market hinges on the ability to adapt tax policies in line with market dynamics and national renewable energy objectives.

"By studying and learning from the tax policies of established REC markets globally, Vietnam can make informed adjustments to promote the growth of this market in the future," he concluded.