Foreign organizations doing business in Vietnam or having income generated in Vietnam through contractor contracts or subcontractor contracts are considered foreign contractors and must fulfill corresponding tax obligations.
1. When are foreign contractors and foreign subcontractors taxpayers?
According to Circular 103/2014/TT-BTC, foreign contractors or foreign subcontractors include:
- foreign business organizations with or without permanent establishments in Vietnam; or
- foreign individual doing business who is a resident of Vietnam or not a resident of Vietnam.
A foreign contractor or foreign subcontractor is determined to be a taxpayer according to Vietnamese Law if it does business in Vietnam or has income arising in Vietnam based on a contract, agreement, or commitment between:
- foreign contractor and a Vietnamese organization or individual (“Contractor Contract”) or
- foreign contractor and a foreign subcontractor to perform part of the work of the Contractor Contract on the basis that the subcontractor contract.
From the above regulations, it can be seen that Vietnamese Law does not distinguish between having a permanent establishment or not having a permanent establishment for foreign enterprises, or being a resident or not a resident for a foreign individual.
The main factors to determine whether a foreign contractor is a taxpayer when:
- doing business in Vietnam, and
- generating income in Vietnam based on the Contractor Contract or subcontractor contract.
This is to avoid missing tax revenue if it only targets foreign businesses and individuals present in Vietnam. Furthermore, to ensure convenient tax collection from foreign contractors and foreign subcontractors and limit procedures that may be difficult to access, the Vietnamese State imposes the responsibility to withhold and pay tax on behalf of foreign contractors and foreign subcontractors to the Vietnamese Party including:
- The organization is established, operates, and registers for operations according to Vietnamese law;
- Other organizations and individuals engaged in production and business.
As a result, when the Vietnamese party purchases services, services associated with goods or pays income arising in Vietnam based on a contractor contract or subcontractor contract; or purchases goods in the form of on-the-spot import and export or according to International Trade Terms (Incoterms); or distribute goods or provide services on behalf of foreign organizations or individuals in Vietnam, Value Added Tax (“VAT”) and Corporate Income Tax (“CIT”) must be deducted before making payments to foreign contractors and foreign subcontractors.
2. Taxes apply to foreign contractors, foreign subcontractors
Foreign contractors, subcontractors are foreign business organizations, and enterprises that are responsible for fulfilling VAT and CIT obligations.
2.1 Services and goods are subject to VAT
The services and goods subject to VAT include:
- Services or services associated with goods subject to VAT provided by foreign contractors and foreign subcontractors in Vietnam and consumed in Vietnam;
- Services or services associated with goods subject to VAT provided by foreign contractors and foreign subcontractors outside Vietnam and consumed in Vietnam.
In addition, exclusions from Vietnamese Taxation:
- credit services and services provided and consumed outside Vietnam;
- supply of goods without together services in the form of delivery at the foreign border gate or Vietnamese border gates are specified in detail in Circular 103/2014/TT-BTC;
- services performed abroad include repairing means of transport (aircraft, aircraft engines, aircraft spare parts, ships), machinery, equipment (including undersea cables, equipment, etc.) whether including accompanying replacement supplies and equipment;
- advertising and marketing services (except internet advertising and marketing).
In case the goods are provided under a contract in the form of a delivery point located within the territory of Vietnam [1] or the suit of goods is accompanied by services performed in Vietnam such as installation, test run, warranty, maintenance, replacement, and other services accompanying the supply of goods (including cases of free accompanying services) [2] (hereinafter collectively referred to as “Goods according to the delivery spot”), the value of the goods is only subject to VAT at the import stage and total services value will be subject to VAT.
In case the contract cannot separate the value of goods and the value of accompanied services (including cases of free accompanied services), VAT is calculated for the entire contract value.
2.2 Corporate income tax of foreign contractors and foreign subcontractors
Regarding income subject to corporate income tax of foreign contractors and foreign subcontractors, it is determined is income arising from goods supply and distribution activities; providing services and services associated with goods in Vietnam on the basis of contractor contracts and subcontractor contracts. For the Goods according to the delivery spot, income subject to CIT of the foreign contractor and foreign subcontractor is the entire value of the goods and services.
In addition, foreign business organizations may also have to pay other taxes and fees obligations such as export, import taxes and customs fees. Furthermore, tax exemption and reduction consideration can be applied if the country where the foreign business organization is registered to establish or operate has signed a Double Taxation Avoidance Agreement with Vietnam.
3. Conclusion
Thus, VAT, CIT, and several other taxes and fees are applied to foreign contractors and foreign subcontractors that do business or generate income in Vietnam through the Contractor Contracts and subcontractor contracts. However, the responsibility for tax withholding and payment is assigned to the Vietnamese Party to ensure avoiding tax loss as well as reducing related procedures with foreign contractors. To ensure compliance and limit disputes, foreign business organizations as well as Vietnamese Parties need to clearly understand a basis for application.
[1] Does not include the use of bonded warehouses or Inland Container Depots (ICDs) as goods warehouses to support international transport activities, transit, border-gate transfer, storage of goods, or processing by other businesses.
[2] Even if the provision of the above services may or may not be included in the value of the goods supply contract.
