A foreign organization or individual conducting profit-generating business in Vietnam is subject to Vietnamese tax. However, whether the sale of goods in Vietnam through local agents or distributors by foreign organizations and individuals is subject to Vietnamese tax is still questionable. The tax implications for foreign organizations and individuals selling goods in Vietnam through local agents or distributors are gradually becoming clearer, enabling foreign exporters to plan their sales to Vietnam in a more predictable and tax efficient manner.
The tax exposure of foreign exporters to Vietnam has changed significantly as a result of the following legal developments:
- Law on Enterprise Income Tax No. 14/2008/QH12 (issued by the National Assembly on 03 June 2008, amended by Law No. 71/2014/QH13 dated 26 November 2014);
- Law on Value- added Tax No. 13/2008/QH12 (issued by the National Assembly on 03 June 2008, amended by Law No. 71/2014/QH13 dated 26 November 2014);
- Law No. 71/2014/QH13 Amending and Supplementing Certain Provisions of Tax Laws (“Law No. 71”) (issued by the National Assembly on 26 November 2014); and
- Circular No. 60/2012/TT-BTC Providing Guidelines for the Tax Regime Applicable to Foreign Organizations and Individuals Operating Businesses in Vietnam or Generating Income in Vietnam (“Circular No. 60”) (issued by the Ministry of Finance on April 12, 2012).
1. Contractor tax
Vietnam tax advisors often refer to the term “Contractor tax” when assessing the tax liabilities of foreign exporters. Circular No. 60 does not actually use the term “contractor tax.” The scope of application of Circular No. 60 includes other entities besides contractors, which are foreign organizations and individuals providing goods in Vietnam by means of on spot import and having income derived in Vietnam according to the contract signed between them and the Vietnamese entities. However, it has become a matter of practice to use the term “contractor tax” to refer to taxes imposed on foreign individuals and organizations conducting business in Vietnam under forms not provided for in the Law on Investment, Law on Petroleum and Law on credit Institutions.
Generally, “contractor tax” refers to value added tax (“VAT”) and enterprise income tax (“CIT”).
A sales agent is defined in the Commercial Law as a merchant who purchases and sells goods in its own name for a principal in order to enjoy remuneration. The Commercial Law stipulates a number of types of agents such as a “commission agent,” “underwriting agent,” “sole agent,” and “general agent.” However, these classifications are not relevant for tax purposes. Instead, the commission is the basis for any tax determination for a sales agent.
The term “distributor” is not defined in the Law on Value Added Tax, the Law on Enterprise Income Tax, the Civil Code, or the Commercial Law.
Practically speaking, a distribution arrangement may be defined so that a Vietnamese distributor may act as an agent or it may purchase goods from foreign merchants.
III. Sale of goods in Vietnam through agents or distributors – TAXABLE OR NOT TAXABLE
In accordance with Circular No. 60, “foreign organizations with or without a permanent establishment in Vietnam, and foreign individuals whether or not residing in Vietnam (“Foreign Contractors”) doing business in Vietnam or deriving income in Vietnam according to a contract, an agreement or commitment between Foreign Contractors with foreign organizations or individuals, or between Foreign Contractors and Foreign Sub-contractors” will be subject to contractor tax. An agent is defined as a permanent establishment of foreign entity.
Contractor tax does not apply to the following entities:
- Foreign organizations and individuals providing goods to Vietnamese organizations and individuals without any service performed in Vietnam in either of the following ways: (i) goods delivery at foreign port; and (ii) goods delivery at Vietnamese port.
- Foreign organizations and individuals deriving income from services supplied and consumed outside Vietnam; and
- Foreign organizations and individuals providing transport means repair services, advertisement and marketing services (except for advertisement and marketing on the internet), investment and trade promotions services, and brokerage services on goods sales and service supply overseas
Agents are responsible for declaring tax payments and paying taxes on behalf of the foreign merchant. The agents must withhold VAT and CIT before remitting payments to foreign merchants.
IV. Tax withholding
Once a Vietnamese organization or individual is deemed to be selling goods for a foreign merchant under an agency arrangement, it is required to register for tax payment, withhold contractor tax (VAT and CIT), and pay taxes on behalf of the foreign merchant before making payments to the foreign merchant.
The remuneration received by the agents or distributors will be accounted for as other revenue during their business course and will be subject to CIT (i.e. subject to the standard CIT rate of 22% after deduction of legitimate business expenses).
Vietnamese agents may register to pay their VAT by the deduction method; rate fixing method or mixed method. The method of paying VAT will affect the method for tax withholding by the agents.
1. Agents registering to pay tax by the deduction and declaration method
Foreign Contractors meeting the below requirements can pay tax by the deduction method:
- having permanent establishment in Vietnam (i.e., agents in the current case);
- the business duration in Vietnam under a contractor or sub-contractor contract of 183 days or more from the effective date of such contract; and
- applying Vietnam Accounting System.
a. With respect to VAT
Payable VAT = output VAT- input VAT
Output VAT = turnover x tax rate
Input VAT = the tax indicated on value added invoice for sold goods or services
The law on VAT stipulates three tax rates: 0%, 5% and 10%. The classification depends on the type of services :
- The tax rate of 0% applies to exported goods and services except for, among others, international transportation, credit and bank services and, above all, technology transfers and intellectual property transfers to foreign countries.
- The tax rate of 5% applies, for example, to scientific services, husbandry, trade and equipment, teaching and study aids and children’s toys.
- And finally, the tax rate of 10% applies to all other goods and services, among others, to petroleum business, commercial power trading, paper, legal advice, cosmetics, hotel, tourism and gastronomy.
b. With respect to CIT
Revenue for CIT calculation defined as total revenue less reasonable and legal expenditures. These expenditures include depreciation, salaries and wages, rent and materials as well as insurance premiums.
Payable CIT = Revenue for CIT calculation x CIT tax rate
The general tax rate is 22%. The rate of CIT applicable to enterprises conducting exploration of natural resources is generally higher and may be set by the licensing authority at its sole discretion between 32% and 50%.
2. Agents registering to pay tax by the rate fixing (or direct) method
Agents registering to pay tax by the direct method will withhold, declare, and pay VAT and CIT on behalf of foreign merchants in accordance with Section 3, Chapter 2 of Circular No. 60. VAT and CIT will be paid on the deemed AV (added value) and CI (corporate income). The deemed AV and CI will be a certain proportion of the “revenue for tax calculation” stipulated by the Ministry of Finance for each business industry.
Revenue for tax calculation is not the amount that is paid to the foreign merchant but the amount based on which withheld VAT and CIT is calculated. Revenue for tax calculation includes all taxes and expenses that the agent pays on behalf of the foreign merchant.
Circular No. 60 provide a formula for calculating revenue for tax calculation (RTC) as follows:
a. With respect to VAT
Revenue not including VAT
Revenue for VAT calculation = ———————————————————–
1- % VAT on RTC x VAT rate
The tax rates are determined by the general VAT law and range between 0%, 5%, 10% and 20%. The special thing here is that under Circular 60 the added value must be determined. Added values are fixed and vary subject to business lines.
No. Business line Value added rate as % of taxable turnover
- Services (excluding petroleum drilling services) , machinery and equipment leasing business and insurance 50
- Petroleum drilling services 70
- Construction and assembly and installation where the tender included supply of materials, machinery and equipment in the construction work 30
- Construction and assembly and installation where the tender did not include supply of materials, machinery and equipment in the construction work 50
- Transportation and other business and production 30
b. With respect to CIT
Agents will declare and pay CIT in accordance with Article 13, Section 3, Chapter 2 of Circular No. 60. The corporate income for CIT calculation will be the deemed income excluding VAT received by Foreign Contractors, not yet deducting taxable income. Revenue for tax calculation includes all taxes and expenses that the agent pays on behalf of the foreign merchant.
Revenue not including CIT
Revenue for CIT calculation = ———————————————————–
1- % CIT on RTC
No. Business line CIT rates as % of taxable turnover
- Trading: distribution and supply of goods, raw materials, supplies, machinery and equipment associated with services in Vietnam (including supply of goods under on spot export-import (excluding the processing of hoods for foreign entities or individuals); supply of goods under DDP, DAT, DAP delivery terms (international commercial terms – Incoterms)) 1
- Services, lease of machinery and equipment, lease of drilling rig 5
- Restaurants, hotels, casino management services 10
- Lease of aircraft, aircraft engines, aircraft spare, ship 2
- Construction and assembly and installation where the tender included or did not include supply of materials, machinery and equipment in the construction work 2
- Other production or business activities and transportation (including sea and air transportation) 2
- Assignments [transfer] of securities, offshore reinsurance, reinsurance transfer commission 0.1
- Derivative financial services 2
- Loan interests 5
- Income from royalties 10
Under an agency arrangement, an agent’s remuneration will be counted as revenue of the agent for calculation of CIT in accordance with the Law on CIT, like other revenue of the Vietnamese agent.
3. Agents registering to pay tax by the mixed method
Foreign Contractors meeting (i) and (ii) in Section IV, Part 1 above and adopts an accounting system according the regulations on accounting and guidance of the Ministry of Finance will pay VAT by the deduction method mentioned in Section IV, Part 1 and CIT by the direct method mentioned in Section IC, Part 2.
V. Tax reduction
In certain circumstances to deal with difficulties faced by entities and individuals, the Government provides a VAT and/ or CIT exemption or reduction for a number of goods and services. Foreign merchants doing business in such goods or services in Vietnam through agents are also entitled to such preferential treatment.
VAT and CIT are the heaviest tax burden on Foreign Contractors. The size, location and scope of work that Foreign Contractors do in Vietnam are of great importance. Foreign Contractors who manage the contract implementation via agents or distributors in Vietnam have the possibility to choose the Vietnam Accounting System. They have to apply to the Ministry of Finance for registration in order to receive the necessary permit. In this context it needs to be taken into consideration that the process of applying for the permit to use the Vietnam Accounting System is very complicated and time consuming. The foreign contractor is then liable to pay both VAT and CIT. Vietnam Accounting System