Vietnam foreign contractor tax (FCT), sometimes known as the withholding tax, is a tax imposed by the Vietnam government on transactions made between a foreign firm or subcontractor and a Vietnamese corporation that take place in Vietnam.
It consists of two different types of taxes –
- An entity that is a foreign contractor is subject to CIT and VAT.
- An individual foreign contractor is subject to VAT and Personal Income Tax.
For more information regarding corporate tax in Vietnam, refer to the following page.
WHICH TRANSACTIONS ARE SUBJECT TO VIETNAM’S FOREIGN CONTRACTOR TAX?
The foreign contractor tax of Vietnam is applicable to the following types of transactions:
Vietnam-based sales of products or commodities by a foreign company. This refers to products that are transported to locations on Vietnamese soil or when a foreign company still maintains control over the ownership, specifications, and expenses of the products’ distribution in Vietnam.
The selling of goods or commodities by a foreign company that are connected to services that will be rendered in Vietnam. Examples include Installation, commissioning, maintenance, etc.
The provision of services in Vietnam by a foreign organisation. This covers pooled telecommunications service fees, training (apart from online training), brokerage, training, and vehicle and machinery repair services.
Be aware that the provisions for tax exemption contain a number of exclusions, including those for services rendered and consumed entirely outside of Vietnam and a number of particular services, such as advertising and marketing (not online).
Additional revenue is due in Vietnam, in any form. This is true regardless of where the business is located. It consists of compensation for breach of contract as well as income from royalties, interest, asset transfers, assignments, and liquidations.
Check this page for the incorporation guide – Vietnam Company Formation
WHICH TRANSACTIONS ARE EXEMPTED FROM VIETNAM’S FOREIGN CONTRACTOR TAX?
- Goods delivered at a foreign border gate – The buyer is responsible for all liabilities, costs, and risks related to receiving the goods and transporting them from the foreign border gate to Vietnam (even if the seller is responsible for the warranty); the seller is responsible for all liabilities, costs, and risks related to goods exported to Vietnam and delivered at the foreign border gate.
- Deliveries at the Vietnamese border gates – The buyer is responsible for all liabilities, costs, and risks related to receiving the goods and transporting them away from the Vietnam border gate (even if the seller is responsible for the warranty); the seller is responsible for all liabilities, costs, and risks related to the goods up until they are delivered at the Vietnamese border gate.
- Services rendered and consumed outside of Vietnam – Vietnam does not impose taxes on income obtained from services rendered and consumed abroad.
- Use of inland clearance depots and bonded warehouses – A Foreign Contractor is exempt from the FCT if they use a bonded warehouse or ICD to store products for international shipping, transshipment, border-transshipment, or to hold goods for other businesses to process.
HOW TO FILE YOUR VIETNAM TAX RETURNS AS A FOREIGN CONTRACTOR?
FCT can be declared using one of three techniques. The direct method, the declaration method (often referred to as the Vietnam Accounting System (VAS) method), and the hybrid technique.
DIRECT METHOD (OR WITHHOLDING METHOD)
This is the most popular and useful approach.
FCT is declared and paid by the Vietnamese party when using the direct method. The Vietnamese party is in charge of filing the contracts with the appropriate tax authorities, withholding, and paying the necessary FCT to the regional tax authority. The foreign contractor cannot be paid until this is completed.
Under the declaration method, the taxable revenue will depend on the nature of the foreign payment which either includes tax (net) or does not (gross).
A “net contract” is one in which the Vietnamese party is in charge of and pays the FCT.
To calculate the contractor’s taxable income in this scenario, the contract payment must be grossed up using the proper FCT rates.
In “gross contract”, the foreign party is in charge of and pays the FCT.
The FCT is borne by the foreign contractor and deducted from total taxable revenue before making payment to said foreign contractor if the contract calls for payment on a gross basis.
Tax rates using the direct method
For different tax categories, there are different tax rates. The nature and scope of the payment or contract will determine which category a transaction falls under, and for more complex arrangements, different foreign contractor withholding tax rates might be applicable.
For example, when different scopes of work and prices are applied when both services and goods or equipment are supplied.
The tax authorities apply the highest rate to the entire contract if it is impossible to differentiate the value of each type of work or service.
Within 10 days of paying a foreign contractor, the FCT must be declared and sent to the tax office.
If a foreign contractor receives many payments on a regular basis, FCT can be declared and sent to the tax office by the 20th of each month.
FOREIGN CONTRACTOR TAX RATES – COMPARISON
|Distribution and supply of goods including: raw materials, supply of goods, machinery and equipment.
|Distribution and supply of goods including: raw materials, supply of goods, machinery and equipment attached to services in Vietnam, including those provided in the form of domestic exports, except for goods processed under processing contracts with foreign entities.
|Supply of goods under Incoterms.
|1.5% or 2%
|Restaurant/Casino management services
|Machinery and equipment leasing and insurance
|Lease of aircraft, aircraft engines, aircraft spare parts and sea going vessels without individual controllers
|Construction and installation with supply of materials, machinery and equipment
|Construction and installation without supply of materials, machinery and equipment
|Production, transportation and service with supply of goods
|Transfer of securities, certificates of deposit, ceding reinsurance abroad, reinsurance commissions
|Derivatives financial services
|Income from royalties
|N/A or 5%
DECLARATION METHOD (VAS METHOD)
According to this method, the foreign business or contractor is taxed similarly to a Vietnamese business or contractor.
As a result, foreign contractors will be required to report and pay CIT at the applicable rate of 20% on their net profit from the project/contract.
This is calculated by deducting the entire deductible expenses from the total revenue. When adopting the declaration method, the foreign contractor is required to pay VAT on the difference.
In doing so, international contractors are required to take on and comply with specific obligations for accounting and tax filings that are necessary for Vietnamese businesses.
For example, they need to apply for a tax code for the project or contracts, send VAT invoices to clients, collect VAT on sales, claim input VAT credits, and pay CIT based on a revenue and cost statement.
For foreign contractors, implementing VAS for a project in Vietnam is entirely optional. The decision to do so will often be made based on whether the tax benefits exceed the tax and administrative costs.
ELIGIBILITY REQUIREMENTS OF VIETNAM FOREIGN CONTRACTOR TAX
The following requirements must be met by foreign contractors who want to use the declaration method to determine their foreign contractor tax obligations:
- They must be a resident for tax reasons or have a permanent establishment in Vietnam.
- Counting from the project’s or contract’s effective date, the project’s or contract’s execution in Vietnam lasts 183 days or longer.
- They adopt the Vietnamese Accounting System (or “VAS”), submit a tax registration application, and receive a tax code (also known as a tax certificate) from the tax authority.
The requirements for using the hybrid method are similar to those for using the VAS method, with the exception that foreign contractors are not required to use the total VAS. Foreign contractors must simply follow the simplified VAS.
This method requires the foreign contractor to pay VAT in accordance with the Declaration Method. CIT, on the other hand, is calculated and collected using the Direct Method.
With this approach, VAT is calculated using revenue minus expenses, whereas CIT is calculated using the aforementioned tax rates.
In this case, the foreign contractor must declare and pay tax directly to the tax authorities and must register the method with the local tax office for this purpose.
THE IMPACT OF DOUBLE TAXATION AGREEMENTS ON THE FCT
The FCT may be significantly impacted by the Double Taxation Agreements (“DTA”) that Vietnam has signed with other nations. If a foreign contractor is from a nation with a DTA with Vietnam and does not have a permanent establishment in Vietnam, they can often avoid paying income tax (but not the VAT) as part of the FCT.
This is due to the fact that most DTAs stipulate that a non-resident company is only subject to taxation in the nation in which it is incorporated, though it may be subject to Vietnamese taxation of its business profits if it has a permanent establishment “PE” there.
Depending on the DTA, a PE’s definition could change. Most, if not all, of Vietnam’s DTAs, are based on the OECD or UN Model DTA, which defines a PE as a fixed place of business where an organization conducts all or part of its operations. A business location needs to be “fixed”. This implies that a specific structure or physical location used to carry out the enterprise’s operations must be permanent.
If a foreign contractor is working on a big project, the FCT might make up a sizable portion of the contract fee. There are various FCT options available to some foreign contractors.
Depending on how the FCT and DTAs interact, they will also have alternatives. All of this means that foreign contractors who the FCT governs must select from the choices that are accessible to them.
Reach out to us at Relin Consultants for more information.
What is exempt from the foreign contractor tax in Vietnam?
Due to a few exceptions provided by Vietnamese legislation, not all foreign contractors are subject to the FCT. For example, in pure purchase agreements, a Vietnamese customer must enter into a contract with a foreign business in order to buy goods or commodities from a foreign country.
What is the difference between foreign contractor tax and withholding tax?
Tax on foreign contractors and withholding tax are identical. Despite being interchangeable, they are the same thing.
Vietnam’s foreign contractor tax comes under which law?
Vietnam’s foreign contractor tax comes under Circular 103/2014/TT-BTC which was issued by the Ministry of Finance in 2014.
Are there any exemptions from FCT?
Yes, there are exemptions from FCT for certain cases, including diplomatic and consular organisations, foreign organisations and individuals who provide technical assistance or non-refundable aid, and those who provide services related to scientific research or technological development.
What are the consequences of non-compliance with FCT?
Failure to comply with FCT requirements can result in penalties and interest charges, as well as legal action.
How can foreign contractors register for FCT?
Foreign contractors must register with the tax authorities before providing services, executing construction contracts, or transferring technology to Vietnam. The registration process includes submitting required documents and paying a registration fee.
How can foreign contractors obtain a refund of FCT?
Foreign contractors can obtain a refund of FCT if they can demonstrate that they have overpaid or that they are entitled to an exemption from FCT. The refund process involves submitting required documents and applying to the tax authorities.
Can foreign contractors use FCT as a credit against their home country tax liability?
The tax laws of each country vary, but in some cases, foreign contractors may be able to use FCT as a credit against their home country tax liability.