On 06 August 2014, the Ministry of Finance issued Circular No. 103/2014/TT- BTC guiding on the implementation of the tax liabilities applicable to foreign organizations, individuals doing business or earning incomes in Vietnam (“Circular 103”), taking effects as from 01 October 2014 and replacing Circular No. 60/2012/TT-BTCT dated 12 April 2012 (“Circular 60”). Regarding the contracts of the foreign contractors which were signed before the effective date of this Circular 104, the VAT and CIT will be continuously determined according to the guidance of the Circular 60 (the valid legal instrument at the signing date of these contracts).
Circular 103 extends significantly the new taxpayers of foreign contractor tax in comparison with the Circular 60, including the followings:
- Foreign contractors distributing goods in Vietnam or providing goods under Incoterms rules that require the sellers to be responsible for goods that have been taken into Vietnam’s territory;
- Foreign contractors performing in whole or in part of goods distribution or service provision in Vietnam, who are still the owners of goods that are delivered to Vietnamese organizations or take responsibility for the cost of distribution, advertising, marketing, quality of goods/services delivered to Vietnamese organizations, or impose prices (including the cases in which the foreign entity authorities or hires some Vietnamese organization to perform part of the distribution or service provision pertaining to goods sale in Vietnam);
- Foreign contractors that negotiates or concludes contracts on the name of the foreign contractors via Vietnamese organizations, individuals;
- Foreign contractors exercising its right to export, import, distribute goods in Vietnam, buy goods to export, or sell goods to Vietnamese traders in accordance with the laws on commerce.
According to the provisions on new taxpayers, foreign traders implementing goods distribution via commercial agencies in Vietnam shall be subject to foreign contractor tax as under the Law on Commerce 2005 the principal is the owner of goods delivered to the agent; concurrently, the right to fix the price of goods and services, the responsibility of some kind of costs and goods quality of the foreign organization in providing goods, services in Vietnam could leads the result of being taxpayers regarding these business activities in Vietnam. In practice, the agreement of provision of goods and services could include clause under which the foreign traders are qualified as taxpayers. Therefore, the parties of any agreement, especially the Vietnamese party should bear in mind the above new regulations to promptly withdraw, make declaration and payment of taxes as required by laws.
Besides, foreign contractors providing goods, delivered at the foreign border checkpoint, not associated with services in Vietnam, even if the sellers is responsible for guaranty; and foreign contractors using a bonded warehouse or inland clearance depot (ICD) as a warehouse serving international transport, transit of goods, or storage of goods to be processed by other companies are not subject to foreign contractor tax.
There is another remarkable point of Circular 103 applicable to construction activities inclusive of raw materials or machinery and equipment that to allow separating each activity for tax calculation instead of calculating tax basing on only the contract value as per the previous Circular 60. If the value of each activity can be separated, the foreign contractors are not required to pay VAT on the value of raw materials or machinery and equipment, which has been paid during importation or is exempt from VAT; corresponding VAT rate shall apply to the remaining value. It is similar to VAT that the correspond CIT rate shall apply to each separated activity. In case, each activity cannot be separated, the VAT of 3% and CIT of 2% shall be applied to the total contract value. Under this new provision, the foreign contractors are more flexible in choosing the favorable method for tax calculation basing on the value of raw materials, machinery and equipment in comparison with the rest activities.