Circular No. 103/2014/TT-BTC dated August 06, 2014 of the Ministry of Finance Guiding the performance of tax obligations of foreign organizations and individuals doing business in Vietnam or earning income in Vietnam

CIRCULAR

Guiding the performance of tax obligations of foreign
organizations and individuals doing business in Vietnam or
earning income in Vietnam[1]

Pursuant to June 3, 2008 Law No. 13/2008/QH12 on Value-Added Tax; June 19, 2013 Law No. 31/2013/QH13 Amending and Supplementing a Number of Articles of the Law on Value-Added Tax; and the Government’s Decree No. 209/2013/ND-CP of December 18, 2013, detailing and guiding the implementation of a number of articles of the Law on Value-Added Tax;

Pursuant to June 3, 2008 Law No. 14/2008/QH12 on Enterprise Income Tax; June 19, 2013 Law No. 32/2013/QH13 Amending and Supplementing a Number of Articles of the Law on Enterprise Income Tax; and the Government’s Decree No. 218/2013/ND-CP of December 26, 2013, detailing and guiding the implementation of a number of articles of the Law on Enterprise Income Tax;

Pursuant to November 29, 2006 Law No. 78/2006/QH11 on Tax Administration, and November 20, 2012 Law No. 21/2012/QH13 Amending and Supplementing a Number of Articles of the Law on Tax Administration;

Pursuant to the Government’s Decree No. 215/2013/ND-CP of December 23, 2013, defining the functions, tasks, powers and organizational structure of the Ministry of Finance;

At the proposal of the Director General of Taxation;

The Minister of Finance promulgates the Circular guiding the performance of tax obligations of foreign organizations and individuals doing business in Vietnam or earning income in Vietnam as follows:

Chapter I

GENERAL PROVISIONS

Article 1. Subjects of application

The guidance in this Circular is applicable to the following subjects (except the cases specified in Article 2, Chapter I):

1. Foreign business organizations with or without permanent establishments in Vietnam; foreign businesspeople who are residents or non-residents in Vietnam (below referred to as foreign contractors and foreign subcontractors) that do business in Vietnam or earn income in Vietnam under contracts, agreements or commitments between foreign contractors and Vietnamese organizations or individuals or between foreign contractors and foreign subcontractors to perform part of the contracts.

2. Foreign organizations and individuals supplying goods in Vietnam in the form of on-spot import and export and earning income in Vietnam under contracts signed between them and enterprises in Vietnam (except cases in which goods are processed and then returned to foreign organizations or individuals), or distributing goods in Vietnam or supplying goods under Incoterms under which the sellers shall bear risks related to goods that have entered the Vietnamese territory.

Example 1:

- Case 1: Overseas enterprise X signs a contract to purchase fabric from Vietnamese enterprise A and asks enterprise A to deliver the goods to Vietnamese enterprise B (in the form of on-spot import and export prescribed by law). Enterprise X earns an income in Vietnam under a contract signed between it and enterprise B (enterprise X sells fabric to enterprise B).

In this case, enterprise X is governed by this Circular and enterprise B shall declare, withhold and pay tax on behalf of enterprise X in accordance with this Circular.

- Case 2: Overseas enterprise Y signs a fabric processing contract with Vietnamese enterprise C and asks enterprise C to deliver the goods to Vietnamese enterprise D for further production (in the form of on-spot import and export prescribed by law). Enterprise Y earns an income in Vietnam under a contract signed between it and enterprise D (enterprise Y sells goods to company D).

In this case, enterprise Y is governed by this Circular and enterprise D shall declare, withhold and pay tax on behalf of enterprise Y in accordance with this Circular.

- Case 3: Overseas enterprise Z signs a fabric processing or purchase contract with Vietnamese enterprise E (enterprise Z supplies raw materials and materials to enterprise E for processing) and asks enterprise E to deliver the goods to Vietnamese enterprise G for further processing (in the form of on-spot import and export processing prescribed by law). After processing, enterprise G returns the goods to enterprise Z and enterprise Z pays processing remuneration to enterprise G under the processing contract.

In this case, enterprise Z is not governed by this Circular.

3. Foreign organizations and individuals that perform some or all of activities of trading in and distributing goods or providing services in Vietnam and remain the owners of goods that are delivered to Vietnamese organizations or still take responsibility for the costs of distribution, advertising, marketing and the quality of goods or services delivered to Vietnamese organizations, or fix selling prices of goods or charges for the provision of services, including also the case of authorizing or hiring some Vietnamese organizations to provide part of the distribution or other services related to the goods sale in Vietnam).

Example 2:

Overseas enterprise A delivers goods to Vietnamese enterprise B or authorizes enterprise B to provide some related services (such as delivery, distribution, marketing, advertising, etc.) while enterprise A remains the owner of goods delivered to enterprise B or takes responsibility for the costs and quality of services or goods delivered to enterprise B, or fixes selling prices of goods or charges for the provision of services. In this case, enterprise A is governed by this Circular.

4. Foreign organizations and individuals that negotiate or conclude in their names contracts via Vietnamese organizations or individuals.

5. Foreign organizations and individuals that exercise the right to import, export and distribute goods in Vietnamese market, buy goods for export, or sell goods to Vietnamese traders in accordance with the commercial law.

Article 2. Subjects not governed by this Circular

The guidance in this Circular is not applicable to:

1. Foreign organizations and individuals doing business in Vietnam under the Law on Investment, the Law on Petroleum or the Law on Credit Institutions.

2. Foreign organizations and individuals supplying goods for Vietnamese organizations and individuals without accompanying services provided in Vietnam in the form of:

- Delivery of goods at a foreign border gate: The seller shall bear all responsibilities, costs and risks related to the export and delivery of goods at the foreign border gate; the buyer shall bear all responsibilities, costs and risks related to the receipt and transport of goods from the foreign border gate to Vietnam (even if goods are delivered at a foreign border gate under a contract which states that the seller has the responsibility and obligation to provide warranty).

- Delivery at a Vietnamese border gate: The seller shall bear all responsibilities, costs and risks related to goods until goods reach the place of delivery in a Vietnamese border gate; the buyer shall bear all responsibilities, costs and risks related to the receipt and transport of goods from the Vietnamese border gate (even if goods are delivered at a Vietnamese border gate under a contract which states that the seller has the responsibility and obligation to provide warranty).

Example 3:

Vietnam-based company C signs a contract to import excavators and bulldozers with overseas company D which states that goods shall be delivered at a Vietnamese border gate. Company D shall bear all responsibilities and costs related to the goods until they arrive at the place of delivery in a Vietnamese border gate; company C shall bear all responsibilities and costs related to the receipt and transport of goods from the Vietnamese border gate. The contract states that the goods enjoy a one-year warranty by company D and company D shall not provide any other services related to such goods in Vietnam. In this case, company D’s provision of goods is not governed by this Circular.

3. Foreign organizations and individuals that earn income from services provided and used outside Vietnam.

Example 4:

Company H of Hong Kong provides cargo handling services at a port in Hong Kong for an international shipping fleet of company A in Vietnam. Company A has to pay charges for cargo handling services at Hong Kong port to company H.

In this case, cargo handling services at Hong Kong port are provided and consumed in Hong Kong, so they are not taxed in Vietnam.

Example 5:

Professional services, bond management and issuance services, legal counseling, depository agency and roadshow organization services provided by a foreign organization for company A in Vietnam in countries where company A issues its GDRs (Global Depository Receipts) and international bonds are not governed by this Circular.

4. Foreign organizations and individuals that provide the following services overseas for Vietnamese organizations and individuals:

- Repair of aircraft, aircraft engine, aircraft and ship parts, machinery and equipment (including also undersea cables and transmission devices) with or without spare parts;

- Advertising and marketing (except online advertising and marketing);

Example 6:

A Vietnamese enterprise signs a contract with an organization in Singapore to run advertisements for products in Singapore. This advertising service is not governed by this Circular. If the organization in Singapore runs advertisements for products to be consumed on Vietnam’s market, income from this advertising service is governed by this Circular.

- Trade and investment promotion;

- Brokering: goods sale and service provision overseas;

Example 7:

In case a Vietnamese enterprise signs a contract to hire an enterprise in Thailand as a broker for the sale of its goods in Thailand or on the international market, this brokerage service is not governed by this Circular. In case the Vietnamese enterprise signs a contract to hire an enterprise in Thailand as a broker for the transfer of the Vietnamese enterprise’s real estate in Vietnam, this brokerage service is governed by this Circular.

- Training (except online training);

Example 8:

In case company A in Vietnam signs a contract with University B of Singapore for training of Vietnamese employees at University B, the training service provided by University B is not governed by this Circular. In case company A in Vietnam signs a contract with University B to provide online training for Vietnamese employees in Vietnam, the online training service provided by University B is governed by this Circular.

- Division of charges for international telecommunications services between Vietnam and foreign countries, which are provided outside Vietnam, lease of transmission lines and satellite frequency bands overseas in accordance with the Law on Telecommunications; division of charges for international postal services between Vietnam and foreign countries in accordance with the Law on Post and treaties on post to which Vietnam is a contracting party, which are provided outside Vietnam.

5. Foreign organizations and individuals using a bonded warehouse or inland clearance depot (ICD) as a warehouse serving international transport, transit, border-gate transfer  or storage of goods or for processing by other enterprises.

Article 3. Interpretation of terms

In this Circular, the terms below are construed as follows:

1. Contract means a contract, an agreement or a commitment between a foreign contractor and a Vietnamese party.

2. Subcontract means a contract, an agreement or a commitment between a foreign contractor and a subcontractor.

Subcontractors include foreign subcontractors and Vietnamese subcontractors.

3. Vietnamese territory covers Vietnam’s mainland, islands, internal waters, territorial sea and the airspace above, the waters beyond the territorial sea, including seabed and the soil under the seabed, over which Vietnam exercises its sovereignty, sovereign rights and jurisdiction in accordance with Vietnamese law and international law.

Article 4. Taxpayers

1. Foreign contractors and foreign subcontractors that meet the conditions prescribed in Article 8, Section 2, Chapter II or Article 14, Section 4, Chapter II, do business or earn income in Vietnam. The business is done under the contract with a Vietnamese organization or individual or under the subcontract with another foreign organization or individual doing business in Vietnam.

Foreign contractors and foreign subcontractors that have permanent establishments in Vietnam or are residents in Vietnam shall be determined under the Law on Enterprise Income Tax, the Law on Personal Income Tax and guiding documents.

If permanent establishments and residents are defined otherwise by a double taxation avoidance agreement to which Vietnam is a contracting party, such agreement shall apply.

2. Organizations established and operating under Vietnamese law or register their operation under Vietnamese law; other organizations and individuals engaged in purchasing services and services accompanying goods or paying incomes in Vietnam under contracts or subcontracts; purchasing goods in the form of on-spot import and export or under Incoterms; distributing goods or providing services on behalf of foreign organizations and individuals in Vietnam (below referred to as Vietnamese parties), including:

- Business organizations established under the Law on Enterprises, the Law on Investment or the Law on Cooperatives;

- Economic organizations of political organizations, socio-political organizations, social organizations, socio-professional organizations, armed forces units, non-business organizations and other organizations;

- Petroleum contractors operating under the Law on Petroleum;

- Branches of foreign companies licensed to operate in Vietnam;

- Foreign organizations or representatives of foreign organizations licensed to operate in Vietnam;

- Vietnam-based air ticket sale offices or agents of foreign airlines that have the right to operate flights to and from Vietnam and provide transport services directly or through partnership;

- Vietnam-based organizations and individuals providing shipping services of foreign shipping companies; Vietnam-based agents of foreign logistics and forwarding and delivery companies;

- Securities companies, securities issuers, fund management companies, commercial banks where foreign securities investment funds or organizations open their securities investment accounts;

- Other organizations in Vietnam;

- Individuals conducting business and production in Vietnam.

Taxpayers defined in Clause 2, Article 4, Chapter I shall withhold value-added tax and enterprise income tax as guided in Section 3, Chapter II before making payments to foreign contractors and foreign subcontractors.

Article 5. Applicable taxes

1. Foreign contractors and subcontractors being business organizations shall pay value-added tax and enterprise income tax under the guidance in this Circular.

2. Foreign contractors and subcontractors being foreign businesspeople shall pay value-added tax under the guidance in this Circular and pay personal income tax in accordance with the law on personal income tax.

3. Foreign contractors and subcontractors shall pay other taxes, charges and fees in accordance with current legal documents on other taxes, charges and fees.

Chapter II

TAX BASES AND CALCULATION METHODS

Section 1

OBJECTS SUBJECT TO VALUE-ADDED TAX AND INCOMES SUBJECT TO ENTERPRISE INCOME TAX

Article 6. Objects subject to value-added tax

1. Services or services accompanying goods subject to value-added tax that are provided by foreign contractors or foreign subcontractors under contracts or subcontracts and used for production, business or consumption in Vietnam (except the case specified in Article 2 of Chapter I), including:

- Services or services accompanying goods subject to value-added tax that are provided in Vietnam by foreign contractors or foreign subcontractors and consumed in Vietnam;

- Services or services accompanying goods subject to value-added tax that are provided outside Vietnam by foreign contractors or foreign subcontractors and consumed in Vietnam.

2. If a contract stipulates that goods shall be delivered to a location in Vietnam (except the case specified in Clause 5, Article 2, Chapter I), or goods supply is accompanied by services provided in Vietnam such as installation, test run, warranty, maintenance, replacement or other services (including also free-of-charge services), whether or not such services are part of the value of the goods supply contract, the value of goods is only subject to value-added tax at the stage of importation under regulations. The value of services is subject to value-added tax as guided in this Circular. If the contract does not separate the value of goods from that of accompanying services (even in the case of free-of-charge services), the whole contract is subject to value-added tax.

Example 9:

Enterprise A in Vietnam signs a contract with enterprise B overseas to buy a machinery and equipment line for a cement factory. The total contract value is USD 100 million, including USD 80 million of machinery and equipment (some of them are subject to 10% value-added tax) and USD 20 million of installation instruction, installation supervision, warranty and maintenance services.

Value-added tax payable by enterprise B for the value of the contract signed with enterprise A shall be determined as follows:

- Value-added tax shall be imposed on the value of services (USD 20 million), not on the value of imported machinery and equipment.

- If the value of services cannot be separated from that of machinery and equipment, value-added tax shall be imposed on the whole contract value (USD 100 million).

Article 7. Incomes subject to enterprise income tax

1. Income subject to enterprise income tax of foreign contractors and foreign subcontractors is income from supply and distribution of goods; provision of services and services accompanying goods in Vietnam under contracts and subcontracts (except the case specified in Article 2, Chapter I).

2. If goods are delivered to a location in Vietnam (except the case specified in Clause 5, Article 2, Chapter I), or goods supply is accompanied by some services provided in Vietnam such as marketing, sale promotion, post-sale services, installation, test run, warranty, maintenance, replacement and other services (including also free-of-charge services), whether or not such services are part of the value of the goods supply contract, income subject to enterprise income tax of foreign contractors and foreign subcontractors is the total value of goods and services.

Example 10:

Company A in Vietnam signs a contract with company B overseas to buy a machinery and equipment line for a cement factory project. The total contract value is USD 100 million (value-added tax-exclusive), including USD 80 million of machinery and equipment and USD 20 million of installation instruction, installation supervision, warranty and maintenance services.

Enterprise income tax payable by company B for the value of the contract shall be determined as follows:

- Enterprise income tax on the value of the imported machinery and equipment line (USD 80 million) and on the value of services (USD 20 million) shall be calculated separately at specific rates under regulations.

- If the value of the machinery and equipment line is not separated from that of services, enterprise income tax shall be imposed on the total contract value (USD 100 million) at a specific rate under regulations.

3. Incomes earned in Vietnam by foreign contractors and foreign subcontractors are incomes they receive in any forms under contracts and subcontracts (except the case specified in Article 2, Chapter I), regardless of their business locations. Taxable incomes of foreign contractors and foreign subcontractors in some specific cases include:

- Income from transfer of the right to own or use property, transfer of the right to participate in economic contracts/projects in Vietnam, transfer of the property right in Vietnam.

- Income from copyright royalty, which means income in any forms paid for the right to use or transfer of intellectual property rights and transfer of technologies and software copyright (including payments for the right to use, transfer of author right and owner right of works; transfer of industrial property rights, transfer of technologies and software copyright).

“Author right and owner right of works,” “industrial property rights” and “technology transfer” are defined in the Civil Code, the Law on Intellectual Property, the Law on Technology Transfer and guiding documents.

- Income from transfer and liquidation of assets.

- Income from loan interests, which means income of the creditor from loans in any form, whether or not such loans are secured, whether or not the creditor receives yields of the borrower; income from deposit interests (except deposit interests of foreigners and interests derived from deposit accounts used to maintain operation in Vietnam of diplomatic missions, representative offices of international organizations and non-governmental organizations in Vietnam), including associated bonuses (if any); income from interests on deferred payments under contracts; income from bond interests and bond discounts (except tax-free bonds), treasury bills; and income from interests on deposit certificates.

Loan interest includes also charges payable by the Vietnamese party under the contract.

- Income from securities transfer.

- Fines and compensation paid by the party breaching the contract.

- Other incomes as prescribed by law.

Section 2

PAYMENT OF VALUE-ADDED TAX BY THE CREDIT METHOD, PAYMENT OF ENTERPRISE INCOME TAX ON THE BASIS OF DECLARATION OF TURNOVER AND EXPENSES FOR DETERMINATION OF TAXABLE INCOME

(below referred to as the declaration method)

Article 8. Subjects of and conditions for application

A foreign contractor or foreign subcontractor may pay tax in accordance with the guidance in Section 2, Chapter II if fully meeting the following conditions:

1. Having a permanent establishment in Vietnam or being a resident in Vietnam;

2. The period of business operation on Vietnam under the contract or subcontract is at least 183 days from the effective date of the contract or subcontract;

3. Applying Vietnam’s accounting regime and having made tax registration with, and having a taxpayer identification number granted by, a tax agency.

Article 9. Value-added tax

The Law on Value-Added Tax and its guiding documents shall apply.

Article 10. Enterprise income tax

The Law on Enterprise Income Tax and its guiding documents shall apply.

Section 3

PAYMENT OF VALUE-ADDED TAX AND ENTERPRISE INCOME TAX ACCORDING TO RATE OF TAX ON TURNOVER

(below referred to as the direct method)

Article 11. Subjects of and conditions for application

If the foreign contractors and subcontractors fail to meet any of the conditions mentioned in Article 8, Section 2, Chapter II, the Vietnamese party shall pay tax on their behalf under the guidance in Articles 12 and 13, Section 3 of Chapter II.

Article 12. Value-added tax

The bases for tax calculation are turnover subject to value-added tax and the rate % for calculation of value-added tax on turnover.

Foreign contractors and foreign subcontractors paying value-added tax according to the method of calculation of tax directly based on added value may not credit value-added tax on goods or services purchased to perform contracts and subcontracts.

1. Turnover subject to value-added tax

a/ Turnover subject to value-added tax:

Turnover subject to value-added tax is total turnover from provision of services and services accompanying goods subject to value-added tax received by the foreign contractor or foreign subcontractor inclusive of payable taxes and costs (if any) paid by the Vietnamese party for the foreign contractor or foreign subcontractor.

b/ Determination of turnover subject to value-added tax in some specific cases:

b.1/ If the contract or subcontract stipulates that turnover earned by the foreign contractor or foreign subcontractor is exclusive of payable value-added tax, the turnover subject to value-added tax shall be converted into value-added tax-inclusive turnover and shall be determined according to the following formula:

Example 11:

Foreign contractor A provides a Vietnamese party a service to supervise the construction of cement factory Z. The contract value is USD 300,000 exclusive of value-added tax (but inclusive of enterprise income tax). In addition, the Vietnamese party provides accommodations and workplaces for managers of foreign contractor A, which are valued at USD 40,000 exclusive of value-added tax. According to the contract, the Vietnamese party shall pay value-added tax on behalf of the foreign contractor. The turnover subject to value-added tax earned by foreign contractor A shall be determined as follows:

Determination of taxable turnover:

b.2/ If a foreign contractor signs a contract with Vietnamese subcontractors or foreign subcontractors that pay tax by the declaration method or foreign subcontractors that pay tax by the mixed method to perform part of the work in the contract signed with the Vietnamese party, and a list of such Vietnamese subcontractors and foreign subcontractors is enclosed with the contract, the turnover subject to value-added tax of the foreign contractor does not include the value of work performed by Vietnamese subcontractors or foreign subcontractors.

In case the foreign contractor signs a contract with suppliers in Vietnam to buy supplies, raw materials, materials, machinery and equipment to perform the contract and buy goods and services for internal use or work other than those specified in the contract, the value of such goods and services shall not be deducted when determining turnover subject to value-added tax of the foreign contractor.

Example 12:

Foreign contractor A signs a contract to build cement factory Z with a Vietnamese party. The total contract value is USD 10 million inclusive of value-added tax. According to the contract, foreign contractor A shall assign part of the construction value (stipulated in the contract signed with the Vietnamese party) to Vietnamese subcontractor B, which is valued at USD 1 million exclusive of value-added tax. In addition, during the construction process, foreign contractor A buys building materials (bricks, cement, sand, etc.), other goods and services such as stationery, car rental and hotel rooms for experts, etc. to serve the contract performance.

In this case, the turnover subject to value-added tax earned by foreign contractor A shall be determined as follows:

Turnover subject to value-added tax = USD 10 million - USD 1 million = USD 9 million

The value of supplies, raw materials, materials, goods and services such as car rental, hotel rooms for experts, stationery, etc. shall not be deducted from the turnover subject to value-added tax of foreign contractor A.

b.3/ If the foreign subcontractors that sign contracts with the foreign contractor pay tax by the direct method, the Vietnamese party shall declare and pay value-added tax on behalf of the foreign contractor and foreign subcontractors according to the rate (%) for calculation of value-added tax on turnover applicable to the business line the foreign contractor and subcontractors perform under the contract and subcontracts. Foreign subcontractors are not required to declare and pay value-added tax on the value of work they perform under the subcontracts signed with the foreign contractor, which has been paid by the Vietnamese party.

b.4/ Turnover subject to value-added tax from renting out machinery, equipment and vehicles is the total rental. If the turnover from renting out machinery, equipment and vehicles includes the costs directly paid by the renters such as insurance, costs of maintenance, registration, operators and shipment from abroad to Vietnam, the turnover subject to value-added tax does not include these costs if proving documents are presented.

b.5/ For outbound (from Vietnam to abroad) international forwarding and logistics services (regardless of whether the service charge is paid by the consignor or the consignee), turnover subject to value-added tax is the whole turnover received by the foreign contractor exclusive of international freights paid to the carrier (by air or sea).

b.6/ For outbound international delivery services (regardless of whether the service charge is paid by the consignor or the consignee), turnover subject to value-added tax is the whole turnover received by the foreign contractor.

Example 13:

Overseas company A provides postal services from abroad to Vietnam and vice versa. The turnover subject to value-added tax earned by company A shall be determined as follows:

+ Turnover from inbound (from abroad to Vietnam) postal services is not subject to value-added tax (regardless of whether service charges are paid by the overseas consignor or Vietnam-based consignee);

+ The whole turnover earned by company A from outbound postal services is subject to value-added tax (regardless of whether service charges are paid by the Vietnam-based consignor or overseas consignee).

Example 14:

Vietnamese company B provides postal services from abroad to Vietnam and vice versa. To provide these services, company B pays overseas company C an amount of USD x. Value-added tax payable by company C shall be determined as follows:

+ For inbound postal services (regardless of whether service charges are paid by the overseas consignor or Vietnam-based consignee), the amount of USD x received by company C is not subject to value-added tax;

+ For outbound postal services (regardless of whether service charges are paid by the overseas consignor or Vietnam-based consignee) the amount of USD x received by company C is not subject to value-added tax; company B shall declare, withhold and pay value-added tax on the x amount paid to company C.

2. Rate (%) for calculation of value-added tax on turnover:

a/ Rate (%) for calculation of value-added tax on turnover applicable to different business lines:

b/ Determination of rates (%) for calculation of value-added tax on turnover in some specific cases:

b.1/ If the contract or subcontract covers various business activities or part of the contract value is not subject to value-added tax, the rates (%) for calculation of value-added tax on turnover shall be applied based on the turnover subject to value-added tax of each business activity carried out by the foreign contractor or foreign subcontractor under the contract or subcontract. If the value of each business activity is not separated, the highest rate (%) for calculation of value-added tax on turnover applicable to these business lines shall apply to the whole contract value.

Particularly for construction and installation with supply of raw materials and materials or machinery and equipment of construction works: If the value of each business activity is separated under the contract, the foreign contractor is not required to pay value-added tax on the value of raw materials and materials or machinery and equipment, which has been paid at the stage of importation or is not subject to value-added tax; for the remaining value of work under the contract, the rate (%) for calculation of value-added tax on turnover corresponding to each business activity shall apply. If the value of each activity is not separated, the 3% rate shall apply to calculate value-added tax on the total value of the contract (inclusive of the value of imported raw materials and materials or machinery and equipment). In case the foreign contractor signs contracts with subcontractors to assign the whole value of work with supply of raw materials and materials or machinery and equipment, and only provides the remaining services under the contract, the 5% rate shall apply to calculate value-added tax on the services provided.

Example 15:

Foreign contractor A signs a contract to build power plant X with a Vietnamese party. The contract value is USD 75 million (inclusive of value-added tax).

Case 1: The value of each business activity is separated:

+ Value of machinery and equipment supplied for the plant: USD 50 million.

In which:

Value of machinery and equipment subject to value-added tax: USD 30 million.

Value of machinery and equipment not subject to value-added tax: USD 15 million.

Value of warranty services accompanying machinery and equipment: USD 5 million.

+ Value of technological line design and other design services: USD 5 million.

+ Value of workshops, other auxiliary systems, construction and installation: USD 15 million.

+ Value of supervision services and installation instruction: USD 3 million.

+ Value of technical training and test run services: USD 2 million.

At the stage of importation, value-added tax has been paid for machinery and equipment valued at USD 30 million. The value of machinery and equipment not subject to value-added tax is USD 15 million.

Foreign contractor A shall only pay value-added tax on the value of services and construction and installation in the contract signed with the Vietnamese party. For the value of services (warranty, design, supervision, installation instruction, technical training and test run), which is USD 15 million, the rate (%) for calculation of value-added tax on turnover from service provision is 5%; for the value of construction and installation, which is USD 15 million, the rate for calculation of value-added tax on turnover from construction and installation is 3% (exclusive of value-added tax imposed on the value of imported machinery and equipment).

Case 2: The contract does not separate the value of each business activity and only stipulates that the contract value covers machinery, equipment and design, supervision, installation instruction, technical training and test run services. If there are not adequate documents proving the payment at importation of value-added tax on machinery and equipment supplied for the work, foreign contractor A shall pay 3% value-added tax on the whole contract value, which is USD 75 million.

Case 3: If foreign contractor A signs contracts with subcontractors to assign the work with supply of raw materials and materials and only provides the services (such as supervision and installation instruction), the rate 5% shall apply to calculate value-added tax on turnover.

b.2/ For contracts to supply machinery and equipment accompanied by services provided in Vietnam, if the value of machinery and equipment is separated from that of services, the rate (%) for calculation of value added tax on turnover corresponding to each of such values of the contract shall apply. If the value of machinery and equipment is not separated from that of services, the 3% rate shall apply to calculate value-added tax on turnover.

Example 16:

South Korean contractor H, which does not apply Vietnam’s accounting regime, signs a contract with company B in Vietnam to provide machinery and equipment accompanied by installation and test run services for USD 10 million. The contract does not separate the value of machinery and equipment from that of the services, the 3% rate shall apply to calculate valued-added tax.

3. Value-added tax payable by foreign contractors and subcontractors that provide goods and services for the exploration, prospecting, development and exploitation of oil and gas

a/ If the foreign contractor or foreign subcontractor that provides goods and services for the exploration, prospecting, development and exploitation of oil and gas fails to satisfy one of the conditions specified in Article 8, Section 2, Chapter II, the Vietnamese party shall withhold and pay value-added tax before making payments to the foreign contractor or foreign subcontractor. The amount of tax paid on behalf of the foreign contractor or foreign subcontractor equals (=) the total payment exclusive of value-added tax multiplied by (x) the value-added tax rate applied to the goods or services provided by the foreign contractor.

b/ If the foreign contractor or foreign subcontractor provides goods and services for the exploration, prospecting, development and exploitation of oil and gas satisfies all three conditions specified in Article 8, Section 2, Chapter II or two conditions specified in Clauses 1 and 2, Article 8, Section 2, Chapter II, and practice cost accounting according to the accounting law and guidance of the Ministry of Finance:

- If the Vietnamese party makes payment to the foreign contractor or foreign subcontractor before the latter obtains a tax registration certificate for value-added tax declaration and payment according to the credit method, the Vietnamese party shall withhold and pay value-added tax on the latter’s behalf before making the payment. The amount of tax paid on behalf of the foreign contractor equals (=) the total payment exclusive of value-added tax multiplied by (x) the value-added tax rate applied to the goods or services provided by the foreign contractor.

- If the foreign contractor or foreign subcontractor has been issued a tax registration certificate by the tax agency, they shall transfer invoices and receipts made during the value-added tax declaration period to the Vietnamese party for declaring and paying value-added tax on their behalf.

Input value-added tax arising before the foreign contractor or foreign subcontractor is issued a tax registration certificate may not be credited.

Example 17:

In January 2015, foreign contractor A signs a contract with a Vietnamese party to provide petroleum services for USD 1 million. Before obtaining a tax registration certificate from the tax agency, foreign contractor A incurs a value-added tax of USD 5,000 on purchased goods and services for the contract performance. On March 15, 2015, the Vietnamese party pays USD 100,000 to foreign contractor A (exclusive of value-added tax and inclusive of enterprise income tax). The Vietnamese party shall pay value-added tax on behalf of foreign contractor A, which equals (=) USD 100,000 x 10% = USD 10,000.

On May 1, 2015, foreign contractor A makes registration and is issued a tax registration certificate by the tax agency. In May 2015, the Vietnamese party pays USD 200,000 to foreign contractor A (exclusive of value-added tax and inclusive of enterprise income tax). Thus, the output value-added tax payable by foreign contractor A in May is USD 20,000 (= USD 200,000 x 10%).

Foreign contractor A’s input value-added tax incurred during the period from May 1, 2015, to May 30, 2015, is USD 2,000 (during this period foreign contractor A has a taxpayer identification number). Foreign contractor A shall transfer all invoices and receipts made in May 2015 to the Vietnamese party for declaring and paying value-added tax on behalf of foreign contractor A.

The value-added tax payable by foreign contractor A in the tax period of May 2015 is USD 18,000 (= USD 20,000 - USD 2,000).

Foreign contractor A may not credit USD 5,000 of input value-added tax incurred before May 1, 2015.

Article 13. Enterprise income tax

The tax bases include turnover subject to enterprise income tax and rate (%) of enterprise income tax on taxable turnover.

1. Turnover subject to enterprise income tax

a/ Turnover subject to enterprise income tax

Turnover subject to enterprise income tax is the total turnover exclusive of value-added tax received by a foreign contractor or foreign subcontractor, exclusive of payable taxes. Turnover subject to enterprise income tax includes also the costs (if any) paid by the Vietnamese party on behalf of the foreign contractor or foreign subcontractor.

b/ Determination of turnover subject to enterprise income tax in some specific cases:

b.1/ If the contract or subcontract stipulates that turnover received by the foreign contractor or foreign subcontractor is exclusive of enterprise income tax, the turnover subject to enterprise income tax shall be determined according to the following formula:

Example 18:

Foreign contractor A signs a contract with a Vietnamese party to supervise the construction of cement factory Z. The contract value is USD 285,000 exclusive of valued-added tax and enterprise income tax. In addition, the Vietnamese party provides accommodations and workplaces for managers of foreign contractor A, which are valued at USD 38,000 exclusive of value-added tax and enterprise income tax. According to the contract, the Vietnamese party shall pay value-added tax and enterprise income tax on behalf of the foreign contractor. Enterprise income tax payable by foreign contractor A shall be determined as follows:

Determination of taxable turnover:

b.2/ If a foreign contractor signs a contract with Vietnamese subcontractors or foreign subcontractors paying tax according to the declaration method or foreign subcontractors paying tax according to the mixed methods to assign part of the work in the contract signed with the Vietnamese party, and a list of such Vietnamese or foreign subcontractors is enclosed with the contract, the turnover subject to enterprise income tax of the foreign contractor does not include the value of work performed by Vietnamese or foreign subcontractors.

In case the foreign contractor signs a contract with suppliers in Vietnam to buy supplies, raw materials, materials, machinery and equipment to perform the contract, and buy goods and services for internal use or work other than that stated in the contract, the value of such goods and services shall not be deducted when calculating turnover subject to enterprise income tax of the foreign contractor.

Example 19:

Foreign contractor A signs a contract to build cement factory Z with a Vietnamese party. The total contract value is USD 9 million exclusive of value-added tax. According to the contract, foreign contractor A shall assign part of the construction and installation (stipulated in the contract signed with the Vietnamese party) to Vietnamese subcontractor B, which is valued at USD 1 million exclusive of value-added tax. In addition, during the construction process, foreign contractor A buys building materials (bricks, cement, sand, etc.), other goods and services such as stationery, car rental and hotel rooms for experts, etc., to serve the contract performance.

In this case, the turnover subject to enterprise income tax earned by foreign contractor A shall be determined as follows:

Turnover subject to enterprise income tax = USD 9 million - USD 1 million = USD 8 million

The value of supplies, raw materials, materials, goods and services such as car rental, hotel rooms for experts, stationery, etc., shall not be subtracted from the turnover subject to enterprise income tax of foreign contractor A.

b.3/ If the foreign subcontractors that sign contracts with the foreign contractor pay tax according to the direct method, the Vietnamese party shall declare and pay enterprise income tax on behalf of the foreign contractor and foreign subcontractors according to the rate (%) of enterprise income tax based on taxable turnover corresponding to the business line performed by the foreign contractor or foreign subcontractors under the contract and subcontracts. Foreign subcontractors are not required to declare and pay enterprise income tax on the value of work they perform under subcontracts signed with the foreign contractor, which has been paid by the Vietnamese party on their behalf.

b.4/ Turnover subject to enterprise income tax from renting out of machinery, equipment and vehicles is the total rental. If the turnover from renting out vehicles, machinery and equipment includes the costs directly paid by the renters such as insurance, costs of maintenance, registration, operators and shipment from abroad to Vietnam, the turnover subject to enterprise income tax does not include such costs if proving documents are presented.

b.5/ Turnover subject to enterprise income tax of a foreign airline is the turnover from selling air tickets, airway bills and other revenues (except those collected on behalf of the State or other organizations as prescribed by law) in Vietnam from the transport of passengers, cargo and other objects by its own flights or flights in partnership with other airlines.

Example 20:

In the 1^st quarter of 2013, foreign airline A earns a turnover of USD 100,000, including USD 85,000 from passenger air tickets, USD 10,000 from airway bills, and USD 5,000 from miscellaneous charge orders (MCOs); at the same time it collected on behalf of the State USD 1,000 of airport fee and paid USD 2,000 for returned tickets.

Turnover subject to enterprise income tax earned by foreign airline A in the 1^st quarter of 2013 shall be calculated as follows:

Turnover subject to enterprise income tax = 100,000 - (1,000 + 2,000) = USD 97,000

b.6/ Turnover subject to enterprise income tax of a foreign shipping company is the total freight for transport of passengers and cargo, and other surcharges received by the shipping company from a Vietnamese loading port to the final unloading port (including freights for the consignments transshipped through intermediate ports) and/or freights for transport of cargo between Vietnamese ports.

The freight being the basis for calculating enterprise income tax does not include the freight on which enterprise income tax has been paid at a Vietnamese port for the foreign ship owner and the freight paid to a Vietnamese carrier for transporting goods from a Vietnamese port to an intermediate port.

Example 21:

Company A acts as an agent of foreign shipping company X. According to the shipping agency contract, company A, on behalf of company X, receives goods to be transported abroad, issues bills of lading, collects freights, etc.

Vietnamese enterprise B hires company X (via company A) to transport goods from Vietnam to the U.S. for USD 100,000.

Company A hires ships from the Vietnamese enterprise or foreign ships to carry goods from Vietnam to Singapore for USD 20,000. From Singapore, goods shall be transported to the U.S. by ships of company X.

Turnover subject to enterprise income tax of company X shall be determined as follows:

Turnover subject to enterprise income tax = 100,000 - 20,000 = USD 80,000

b.7/ Turnover subject to enterprise income tax from outbound forwarding and logistics services (regardless of whether the service charge is paid by the consignor or consignee) is the whole turnover received by the foreign contractor exclusive of international transport charge payable to the carrier (by air or by sea).

b.8/ Turnover subject to enterprise income tax from outbound postal services (regardless of whether the service charge is paid by the consignor or consignee) is the whole turnover received by the foreign contractor.

Example 22:

Overseas company A provides postal services from abroad to Vietnam and vice versa. The turnover subject to enterprise income tax earned by company A shall be determined as follows:

+ Turnover from inbound postal services is not subject to enterprise income tax (regardless of whether service charges are paid by the overseas consignor or Vietnam-based consignee);

+ The whole turnover earned by company A from outbound postal services is subject to enterprise income tax (regardless of whether service charges are paid by the Vietnam-based consignor or overseas consignee).

Example 23:

Vietnamese company B provides postal services from abroad to Vietnam and vice versa. To provide these services, company B pays (divides to) overseas company C an amount of USD x. Enterprise income tax incurred by company C shall be determined as follows:

+ The amount of USD x received by company C from inbound postal services is not subject to enterprise income tax (regardless of whether service charges are paid by the overseas consignor or Vietnam-based consignee);

+ For outbound postal services (regardless of whether service charges are paid by the Vietnam-based consignor or overseas consignee), the amount of USD x received by company C is not subject to enterprise income tax; company B shall declare, withhold and pay enterprise income tax on the x amount paid to company C.

b.9/ Turnover subject to enterprise income tax from reinsurance shall be determined as follows:

- Turnover subject to enterprise income tax from ceding reinsurance abroad is the charge for ceding reinsurance abroad received by the foreign contractor (including reinsurance commission and indemnity paid to clients as agreed).

- Turnover subject to enterprise income tax from receipt of reinsurance from abroad is the reinsurance commission received by the foreign contractor.

b.10/ Turnover subject to enterprise income tax from securities transfer shall be determined as follows:

Turnover subject to enterprise income tax from transferring securities and deposit certificates is the total turnover from selling securities and deposit certificates at the time of transfer.

b.11/ Turnover subject to enterprise income tax from interest rate swap is the difference between the interest receivable and interest payable received by the foreign contractor within a calendar year. The determination of tax period according to calendar year must comply with the Law on Enterprise Income Tax, the Law on Tax Administration and guiding documents.

Example 24:

Bank A extends a loan of USD 10 million with a fixed monthly interest rate of 5.2%. The contract performance period is 3 years from February 1, 2012, to February 1, 2015. Payments shall be made every 6 months at the beginning of the period.

According to the loan contract, A negotiates with overseas bank B to perform the interest rate swap contract, specifically:

- The contract performance period is 3 years from February 1, 2012, to February 1, 2015. Payments shall be made every 6 months at the beginning of the period.

- The floating rate of interest payable by A to B is libor + 0.25% and B has to pay A at a fixed interest rate of 5.2%. This means if libor + 0.25% is higher than the fixed interest rate in the swap contract, B will receive a difference of interest from A, which equals  (libor + 0.25%) - interest payable at 5.2%. On the contrary, if libor + 0.25% is lower than the fixed interest rate in the swap contract, A will receive a difference of interest from B, which equals 5.2% - interest received by A at an interest rate of libor + 0.25%.

Turnover subject to enterprise income tax received by B shall be determined as follows:

- In 2012 (from January 1, 2012, to December 31, 2012): Total amount B receives from A is (15,000 - 5,000) = USD 10,000;

- In 2013 (from January 1, 2013, to December 31, 2013): Total amount B receives from A is (5,000 - 0) = USD 5,000;

- In 2014 (from January 1, 2014, to December 31, 2014): B has to pay A USD 5,000 (taxable turnover = 0)

- In 2015: The contract stipulates that payments are made at the beginning of the period, thus there is no clearing payment between A and B.

b.12/ For treasury bills:

Turnover subject to enterprise income tax from each type of treasury bills held by investors shall be determined on their maturity date.

Turnover subject to enterprise income tax received from treasury bills shall be determined as follows:

The weighted mean of buying prices of treasury bills held by the investor on the maturity date shall be calculated in three steps:

Step 1: Determine the quantity of treasury bills held on the maturity date.

Step 2: Determine the quantity, buying point of time, and corresponding buying price of the treasury bills held on the maturity date (determined in step 1) under the first-in-first-out rule.

Step 3: Determine the weighted average buying price according to the formula:

= ∑(Quantity of treasury bills held on the maturity date at different buying points of time x Corresponding buying prices at the buying points of time) ÷ Quantity of treasury bills held on the maturity date.

Example 25: On January 1, 2015, treasury bills X with a face value of VND 100,000 and a 6-month term are issued for VND 89,000 per treasury bill. After being issued, treasury bills are posted on HNX. Investor A makes several transactions below from January 2 to July 1, 2015 (maturity date):

Step 1: Determine the quantity of treasury bills held on the maturity date: (100 + 100 + 40) - (70 +20) = 150

Step 2: Determine the quantity, buying point of time, and corresponding buying price of the treasury bills held on the maturity date after subtracting the quantity of sold treasury bills according to the first-in-first-out rule: 150 treasury bills are held on the maturity date, including:

+ 10 treasury bills at VND 90,000 bought on January 2, 2015

+ 100 treasury bills at VND 92,000 bought on February 1, 2015

+ 40 treasury bills at VND 94,000 bought on April 1, 2015

Step 3: Determine the weighted average buying price according to the formula:

Weighted average buying price: [(40 x 94,000 + 100 x 92,000 + 10 x 90,000)/150] = VND 92.400

Turnover subject to enterprise income tax from the quantity of treasury bills received by the investor on the maturity date: (100,000 - 92,400) x 150 = VND 1,140,000.

2. Rate (%) of enterprise income tax on taxable turnover

a/ Rates (%) of enterprise income tax on taxable turnover applicable to different business lines:

b/ Rate (%) of enterprise income tax on taxable turnover in some specific cases:

b.1/ If a contract or subcontract covers various business activities, when determining the payable enterprise income tax, the application of rates of enterprise income tax on taxable turnover shall be based on turnover subject to enterprise income tax from each business activity carried out by the foreign contractor or foreign subcontractor under the contract. If the value of each business activity cannot be separated, the highest rate of enterprise income tax shall apply to the whole contract value.

Particularly for construction and installation with supply of raw materials and materials or machinery and equipment of construction works: If the value of each business activity is separated in the contract, the corresponding rate of enterprise income tax on turnover shall apply to each business activity. If the value of each business activity cannot be separated, the 2% enterprise income tax shall apply to the whole contract value. In case the foreign contractor signs contracts with subcontractors to assign the work with supply of raw materials and materials or machinery and equipment, and only provides the remaining services under the contract, the 5% enterprise income tax shall apply to these services.

Example 26:

Foreign contractor A signs a contract to build power plant X with a Vietnamese party. The contract value is USD 75 million (exclusive of value-added tax and inclusive of enterprise income tax).

Case 1: Value of each business activity is separated in the contract:

+ Value of machinery and equipment supplied for the construction: USD 50 million.

Including:

Value of machinery and equipment: USD 45 million

Value of warranty services accompanying machinery and equipment: USD 5 million

+ Value of technological line design and other design services: USD 5 million.

+ Value of workshops, other auxiliary systems, construction and installation activities: USD 15 million.

+ Value of supervision and installation instruction: USD 3 million.

+ Value of technical training and test run services: USD 2 million.

The rates of enterprise income tax shall apply as follows: 1% on USD 45 million of machinery and equipment, 2% on USD 15 million of construction and installation; 5% on USD 15 million of other services (warranty, design, supervision, installation instructions, technical training and test run).

Case 2: If the value of each business activity is not separated in the contract, the 2% enterprise income tax shall apply to the whole contract value of USD 75 million.

Case 3: If foreign contractor A signs contracts with subcontractors to assign the work with supply of raw materials and materials, and only provides the services (such as supervision and installation instruction), the 5% enterprise income tax shall apply to the value of such services.

b.2/ For contracts to provide machinery and equipment accompanied by services provided in Vietnam, if the value of machinery and equipment can be separated from that of services, different enterprise income tax rates shall apply to different parts of the contract. If the value of machinery and equipment is not separated from that of services, the 2% enterprise income tax shall apply.

Example 27:

Foreign contractor A signs a contract with a Vietnamese party to provide a machinery and equipment line for USD 70 million, including:

+ Value of machinery and equipment supplied for the construction: USD 60 million.

+ Value of technological line design and other design services: USD 5 million

+ Value of supervision and installation instruction services: USD 3 million.

+ Value of technical training and test run services: USD 2 million.

If the value of machinery and equipment can be separated from that of services, the enterprise income tax rate applicable to trade shall apply to the value of machinery and equipment; the enterprise income tax rate applicable to services shall apply to the value of design, supervision, installation, training, and test run services.

If not, the 2% enterprise income tax shall apply to the whole contract value (USD 70 million).

3. Enterprise income tax on compensation paid by the party that breaches the contract, which is higher than the damage and thus considered a taxable income:

Foreign contractors may declare and pay enterprise income tax on the income from compensation at the rate of enterprise income tax on taxable turnover or according to the declaration of turnover and expenses at the common tax rate.

Section 4

PAYMENT OF VALUE-ADDED TAX ACCORDING TO THE CREDIT METHOD, PAYMENT OF ENTERPRISE INCOME TAX ACCORDING TO RATE (%) OF TAX ON TURNOVER

(below referred to as mixed method)

Article 14. Subjects of and conditions for application

Foreign contractors and foreign subcontractors that fully meet the two conditions specified in Clauses 1 and 2, Article 8, Section 2 of Chapter II, and practice cost accounting according to the accounting law and the guidance of the Ministry of Finance shall register with tax agencies the payment of value-added tax according to the credit method and payment of enterprise income tax according to the rate of tax on taxable turnover.

Article 15. Value-added tax

The guidance in Article 9, Section 2 of Chapter II shall apply.

Article 16. Enterprise income tax

The guidance in Article 13, Section 3 of Chapter II shall apply.

Chapter III

ORGANIZATION OF IMPLEMENTATION

Article 17. Effect

1. This Circular takes effect on October 1, 2014, and replaces Circular No. 60/2012/TT-BTC of April 12, 2012, guiding the performance of tax obligations of foreign organizations and individuals doing business in Vietnam or earning income in Vietnam.

2. Valued-added tax and enterprise income tax on the contracts and subcontracts signed before the effective date of this Circular shall be determined in accordance with relevant legal documents effective on the contract signing dates.

3. In case a treaty to which Vietnam is a contracting party contains provisions on tax obligations of foreign contractors and foreign subcontractors that are different from those of this Circular, the provisions of such treaty shall apply.

Any difficulties arising in the course of implementation of this Circular should be reported to the Ministry of Finance for consideration and settlement.-

For the Minister of Finance
Deputy Minister
DO HOANG ANH TUAN