The Singapore-Vietnam Double Taxation Agreement (“DTA”) was signed and entered into force in 1994. A Second Protocol (“2nd Protocol”) amending the existing Singapore-Vietnam DTA entered into force on 11 January 2013. The purpose of this update is to highlight some of the key amendments as set out in the 2nd Protocol.
- Tax on capital gains
Prior to the 2ndProtocol, gains derived by Singapore tax residents from the sale of shares in a Vietnamese property owning company is subject to tax only in Singapore. However, since capital gains are not subject to tax in Singapore, this meant that the Singapore-Vietnam DTA used to provide unconditional protection from Vietnamese tax to Singaporean tax residents disposing their shares in a Vietnamese company, which hold Vietnamese immovable property.
However, following the announcement of the 2nd Protocol, Article 13(4) of the Singapore-Vietnam DTA now provides that gains derived by a Singapore tax resident from the disposal of shares (other than shares of a company listed on the stock exchange in Singapore or Vietnam) deriving more than 50% of their value directly or indirectly from immovable property situated in Vietnam may be taxed in Vietnam.
Please note that under Vietnam law, “immovable property” is broadly interpreted to include land, structures attached to land and property attached to those structures. Since the 2nd Protocol provides no exception for business premises, it could potentially have unintended implications on any company, whether or not in the real estate sector. For example, a company, even though not in the real estate sector, which has its value increased due to an increase in value of its business locations, workshops, etc, could potentially be caught by the revised provision.
Real estate investors from Singapore, including property funds and real estate investment trusts, should consider carefully how the new Article 13(4) of the Singapore-Vietnam DTA may potentially affect their entry into Vietnamese property market.
- Permanent establishment
Generally, the profit attributable to a permanent establishment (“PE”) of a company would be taxed in the State where the PE is located. A PE may include, among other things, a place of management, a branch, an office or a workshop. The 2ndProtocol has expanded the definition of PE to include the furnishing of services (including consultancy services) by an enterprise (through employees or other personnel engaged by it for such purpose), provided that activities of that nature continue (for the same or a connected project) within a Contracting State for a period (or period aggregating) more than 183 days within any 12 month period.
In other words, a PE exception is effectively available for short-term service provision (i.e., less than 183 days within any 12 month period) by an enterprise of a State which carries out such services in the other Contracting State.
- Reduced withholding tax rate for royalties
Under the Singapore-Vietnam DTA, the withholding tax rate on royalties for the use of (or the right to use), any patent, design or model, plan secret formula or process, industrial, commercial equipment or information concerning industrial, commercial or scientific experience is generally at a reduced rate of 5%. In respect of royalties in all other cases, the reduced rate prior to the recent amendments is 15%. Following the 2nd Protocol, the 15% withholding tax rate has been reduced to 10%.
- Transfer pricing adjustments
The new Article 19(2) of the Singapore-Vietnam DTA provides that where following transfer pricing adjustments by a contracting State to impute profits to an enterprise of that State, and where the tax authorities of both States agree that such profits should be properly imputed, the other contracting State is required to make a corresponding adjustment to the tax incurred in the other contacting State. In other words, if Vietnam tax authorities impose tax on a Vietnam tax resident for transfer pricing purposes, and if both tax authorities of Singapore and Vietnam agree to such imputation of profits by the Vietnam tax authorities, the Singapore tax authorities would likewise be required to make a corresponding adjustment to the tax incurred by the Singapore tax resident.
- Exchange of Information
In line with current global developments, the Exchange of Information article has also been updated to the internationally agreed standard. The new Article 27 of the Singapore-Vietnam DTA now permits exchange of information where it is “foreseeably relevant” for the administration or enforcement of domestic laws concerning any kind of taxes imposed by the Contracting States. Accordingly, if the information is required by Vietnam tax authorities for its domestic tax enforcement purposes, Singapore is now required to release such information, or at least attempt to seek such information on behalf of Vietnam tax authorities.
Following the changes set out in the 2nd Protocol, further enhancement of trade and investment flows between the two countries is anticipated, in addition to greater mutual cooperation between the tax authorities of both countries.