Vietnam Expands Scope of Foreign Contractor Tax
In a newly released circular, the Vietnamese government has expanded the reach of the Foreign Contractor Tax (FCT). The FCT Circular 103/2014/TT-BTC, issued by the Ministry of Finance, replaces the previous FCT Circular 60/2012. Circular 103 came into effect on October 1, 2014.
FCT is the main tax Vietnam levies on foreign companies carrying out activities, or deriving income, within the country. The tax is withheld from the payments made by Vietnamese customers, or contracting parties, to a foreign company.
Foreign businesses are considered foreign contractors if they conduct business or earn income in the country under contract with local organizations and individuals. Usually, foreign contractors are the winners of auctions organized by the Vietnamese government or organizations, and may be principal contractors, general contractors, partnership contractors or subcontractors.
Foreign contractors and sub-contractors in Vietnam are liable to pay the same tax rates applicable to local companies, including import-export duties, personal income tax (PIT), and other taxes required by authorities.
Expanded scope of the FCT
The scope of FCT has been expanded to include foreign entities involved in the distribution of goods or the provision of services in Vietnam, whereby the foreign entities retain ownership of the goods, bear distribution, advertising or marketing costs, are responsible for the quality of goods or services, make pricing decisions, or authorize/hire other Vietnamese entities to carry out part of the distribution of goods/provision of services in Vietnam.
The following were also included in the expanded scope of the new law:
- Foreign entities distributing goods in Vietnam;
- Foreign entities supplying goods under Incoterms where the foreign seller bears the risks of delivery of the goods within Vietnam;
- Foreign entities negotiating and concluding contracts under their names via authorized Vietnamese entities; and
- Foreign entities involved in the export/import and distribution of goods in Vietnam.
Changes to the new law
Additional changes outlined in the new law include:
- Warranty services must actually be undertaken in Vietnam for FCT to apply (the existence of a warranty clause does not necessarily bring a supply contract into the scope of FCT);
- The VAT rate on oil and gas services has been raised to 10 percent;
- The use of a customs bonded warehouse or Inland Container Depot (ICD) port to store goods for international transport, transit, transshipment or for further processing by another (Vietnamese) company is not subject to FCT; and
- Foreign contractors who qualify to receive compensation arising from a breach of contract with their Vietnamese customers can choose to bear FCT CIT at 2 percent of the total compensation received, or 22 percent of the difference between the total compensation and the financial loss resulting from the breach of contract.
How to calculate tax for foreign contractors
The calculation of corporate income tax (CIT) and value-added tax (VAT) for foreign contractors are different depending on the method of payment. There are two methods available:
- Deduction and declaration method: VAT and CIT payments will be filed in the same manner and at the same tax rates as local companies; foreign contractors will be allowed to follow the ordinary method if they satisfy the following conditions:
- They have a permanent establishment or resident status in Vietnam;
- Their duration of conducting business in Vietnam under a contractor or sub-contractor contract is 183 days or more from the effective date of the contract; and
- They apply the Vietnamese accounting system in their business.
- Rate fixing method: this method is applicable when the foreign contractor does not meet one of the conditions mentioned above; the base for calculating VAT and CIT is taxable revenue.
The VAT amount payable is the added value of services or services accompanying VAT-liable goods multiplied by the VAT rate:
Payable VAT amount = Added value x VAT rate
The added value of services or services accompanying VAT-liable goods is the turnover for VAT calculation multiplied by the percentage of the added value to turnover.