Circular No. 60/2012/TT-BTC dated April 12, 2012 of the Ministry of Finance guiding the executing of tax liability applicable to foreign organizations, individuals doing business or earning incomes in Vietnam

THE MINISTRY OF FINANCE

Circular No. 60/2012/TT-BTC of April 12, 2012, guiding the performance of tax obligations applicable to foreign institutions and individuals doing business or earning incomes in Vietnam

Pursuant to June 3, 2008 Law No. 13/2008/QH12 on Value-Added Tax; the Government’s Decree No. 123/2008/ND-CP of December 8, 2008, detailing and guiding a number of articles of the Value-Added Tax Law; and the Government’s Decree No. 121/2011/ND-CP of December 27, 2011, amending and supplementing a number of articles of Decree No. 123/2008/ND-CP;

Pursuant to June 3, 2008 Law No. 14/2008/QH12 on Enterprise Income Tax; the Government’s Decree No. 124/2008/ND-CP of December 11, 2008, detailing and guiding a number of articles of the Law on Enterprise Income Tax; and the Government’s Decree No. 122/2011/ND-CP of December 27, 2011, amending and supplementing Decree No. 124/2008/ND-CP;

Pursuant to November 29, 2006 Law No. 78/2006/QH11 on Tax Administration;

Pursuant to the Government’s Decree No. 118/2008/ND-CP of November 27, 2008, defining the functions, tasks, powers and organizational structure of the Ministry of Finance;

At the proposal of the General Director of Taxation;

The Ministry of Finance promulgates this Circular to guide the performance of tax obligations applicable to foreign institutions and individuals doing business or earning incomes in Vietnam as follows:

Chapter I

GENERAL PROVISIONS

Article 1. Subjects of application

The guidance provided in this Circular is applicable to the following subjects (other than those specified in Article 4, Chapter I of this Circular):

1. Foreign institutions doing businesses in Vietnam with or without Vietnam-based permanent establishments; and resident or non-resident foreign businessmen (below referred to as foreign contractors or foreign subcontractors) doing business in Vietnam or earning incomes in Vietnam under contracts, agreements or commitments between foreign contractors and Vietnamese institutions and individuals or between foreign contractors and foreign subcontractors to perform part of work under contractor contracts.

2. Foreign institutions and individuals that supply goods in Vietnam in the form of on-spot export and earn incomes in Vietnam under contracts signed between them and Vietnam-based enterprises (except for processing and re-export of goods for foreign institutions and individuals) or supply goods under the DDP, DAT or DAP delivery conditions (Incoterms).

Example 1:

- Case 1: Overseas enterprise X signs a contract to purchase cloth from Vietnamese enterprise A, and concurrently designates enterprise A to deliver goods to Vietnamese enterprise B (in the form of on-spot import and export as provided by law). Enterprise X earns incomes in Vietnam under a contract signed with enterprise B (enterprise X sells cloth to enterprise B).

In this case, enterprise X is subject to the application of this Circular and enterprise B shall declare, withhold and pay taxes for enterprise X in accordance with this Circular.

- Case 2: Overseas enterprise Y signs a contract for cloth processing with Vietnamese enterprise C, and concurrently designates enterprise C to deliver goods to Vietnamese enterprise D for further production (in the form of on-spot import and export as provided by law). Enterprise Y earns incomes in Vietnam under a contract signed with enterprise D (enterprise Y sells goods to enterprise D).

In this case, enterprise Y is subject to the application of this Circular and enterprise D shall declare, withhold and pay tax for enterprise Y in accordance with this Circular.

- Case 3: Overseas enterprise Z signs a contract for processing or purchasing cloth with Vietnamese enterprise E (enterprise Z supplies raw materials and materials to enterprise E for processing), and designates enterprise E to deliver goods to Vietnamese enterprise G for further processing (in the form of on-spot import and export processing as provided by law). After having completed the processing, enterprise G re-exports goods to enterprise Z and enterprise Z pays processing remuneration to enterprise G under the processing contract.

In this case, enterprise Z is not subject to the application of this Circular.

Article 2. Taxpayers

1. Foreign contractors and subcontractors that satisfy the conditions specified in Article 8, Section 2, Chapter II or Article 14, Section 4, Chapter II of this Circular and do business or earn incomes in Vietnam, covering its land territory, islands, internal waters, territorial sea and air space above those areas, and sea areas beyond the territorial sea, including the seabed and its subsoil over which Vietnam exercises sovereignty, sovereign rights and jurisdiction in accordance with Vietnamese laws and international law. The business is done under contractor contracts with Vietnamese institutions or individuals or under subcontractor contracts with other foreign institutions or individuals currently doing business in Vietnam.

The determination of foreign contractors and subcontractors having Vietnam-based permanent establishments or being residents in Vietnam complies with the Law on Enterprise Income Tax, the Law on Personal Income Tax and their guiding documents.

In case double taxation avoidance agreements which the Socialist Republic of Vietnam has signed otherwise define permanent establishments and residents, those agreements prevail.

2. Institutions established and operating under Vietnamese laws, institutions registering their operation under Vietnamese laws, other institutions and businessmen buying services or services accompanying goods, or paying incomes generated in Vietnam under contractor or subcontractor contracts (below collectively referred to as Vietnamese parties), including:

- Business institutions established under the Enterprise Law, the State Enterprise Law (now the Enterprise Law), the Law on Foreign Investment in Vietnam (now the Investment Law) and the Law on Cooperatives;

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

- Oil and gas contractors operating under the Petroleum Law;

- Branches of foreign companies licensed to operate in Vietnam;

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

- Vietnam-based booking offices and agents of foreign airlines licensed for Vietnam-inbound and -outbound transportation on their own or in partnership;

- Institutions and individuals providing shipping services of foreign shipping companies; Vietnam-based agents of foreign forwarding and warehousing and delivery companies;

- Securities companies, securities issuing institutions, fund management companies, and commercial banks at which securities investment funds or foreign institutions open securities investment accounts;

- Other institutions in Vietnam;

- Individual producers and businessmen in Vietnam.

Before making payments to foreign contractors or subcontractors, taxpayers specified at Point 2, Article 2, Chapter I of this Circular shall withhold value-added tax and enterprise income tax in accordance with Section 3, Chapter II of this Circular.

Article 3. Applicable taxes

1. Foreign institutional contractors and subcontractors shall pay value-added tax (VAT) and enterprise income tax (EIT) under this Circular.

2. Foreign individual contractors and subcontractors shall pay VAT under this Circular and personal income tax under the law on personal income tax.

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

Article 4. Non-applicable subjects

The guidance in this Circular is not applicable to:

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

2. Foreign institutions and individuals supplying goods to Vietnamese institutions and individuals without accompanying services in Vietnam in the following forms:

- Goods delivery at foreign border gates: Sellers shall bear all obligations, costs and risks related to the export and delivery of goods at foreign border gates; buyers shall bear all obligations, costs and risks related to the receipt and transportation of goods from foreign border gates to Vietnam.

- Goods delivery at Vietnamese border gates: Sellers shall bear all obligations, costs and risks related to the transportation of goods to places of delivery at Vietnamese border gates; buyers shall bear all obligations, costs and risks related to the receipt and transportation of goods from Vietnamese border gates.

3. Foreign institutions and individuals earning incomes from services provided and used outside Vietnam.

Example 2:

Company H in Hong Kong provides the goods arrangement service at ports in Hong Kong for an international fleet of Company A in Vietnam. Company A has to pay charges for this service to Company H.

In this case, such service is provided and used in Hong Kong and, therefore, is not taxed in Vietnam.

Example 3:

In case a foreign institution provides the services of professional operation, management and issuance of bonds, legal counselling, depositary agency, organization of road-shows (a brand activation activity) for Vietnam-based company A in countries where company A issues global depositary receipts (GDR) and international bonds, these services are not subject to the application of this Circular.

4. Foreign institutions and individuals providing overseas the following services for Vietnamese institutions and individuals:

- Repair of means of transport (aircraft, aircraft engines, spare parts of aircraft and seagoing ships), machinery, equipment (including undersea cable lines and transmission equipment) with or without accompanying supplies and spare parts of equipment;

- Advertising and marketing (except advertising and marketing on the Internet);

Example 4:

In case a Vietnamese enterprise signs a contract with an institution in Singapore for advertising its products in Singapore’s market, this service is not subject to the application of this Circular. In case the institution in Singapore advertises the products on the Internet for sale in Vietnam’s market, income from this advertising service is subject to the application of this Circular.

- Investment and trade promotion;

- Brokerage for goods sale or service provision overseas;

Example 5:

In case a Vietnamese enterprise signs a contract to hire an enterprise in Thailand to provide the service of brokerage for the sale of the Vietnamese enterprise’s products in Thailand’s market or the world market, this brokerage service is not subject to the application of this Circular. In case the Vietnamese enterprise signs a contract to hire an enterprise in Thailand to provide the service of brokerage for the transfer of the Vietnamese enterprise’s real estate in Vietnam, this brokerage service is subject to the application of this Circular.

- Training (except online training);

Example 6:

In case company A in Vietnam signs a contract with Singaporean university B for sending Vietnamese employees to Singapore to study at university B, the training service of university B is not subject to the application of this Circular. In case company A in Vietnam signs a contract with Singaporean university B to teach Vietnamese employees in Vietnam in the form of online learning, the online training service of university B is subject to the application of this Circular.

- Division of charges (paid charges) for international post and telecommunications services, which are provided outside Vietnam, among Vietnamese and foreign parties, or the service of renting foreign transmission lines and satellite frequency bands under the Law on Post and the Law on Telecommunications.

Article 5. Terms referred to in this Circular

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

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

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

Subcontractors include foreign and Vietnamese subcontractors.

3. The Vietnamese territory covers the land territory, islands, internal waters, territorial sea and air space above those areas, sea areas beyond the territorial sea, including its seabed and subsoil over which Vietnam exercises sovereignty, sovereign rights and jurisdiction in accordance with Vietnamese laws and international law.

Chapter II

TAX BASES AND TAX CALCULATION METHODS

Section 1

VAT-LIABLE OBJECTS AND EIT-LIABLE INCOMES

Article 6. VAT-liable objects

1. VAT-liable services or services accompanying goods provided by foreign contractors or subcontractors under contractor or subcontractor contracts for production, business and use in Vietnam (other than those specified in Article 4, Chapter I of this Circular), including:

- VAT-liable services or services accompanying goods provided in Vietnam by foreign contractors or subcontractors for use in Vietnam;

- VAT-liable services or services accompanying goods provided outside Vietnam by foreign contractors or subcontractors for use in Vietnam.

2. When goods are supplied under a contract by mode of goods delivery at a place within the Vietnamese territory; or these goods are supplied together with services provided in Vietnam, such as installation, trial operation, warranty, maintenance and replacement and accompanying other services, regardless of whether or not the provision of those services is included in the value of the goods supply contract, the goods value is only liable to VAT at the stage of importation in accordance with regulations while the service value is liable to VAT under the guidance of this Circular. If the contract does not separate the value of goods from that of accompanying services, VAT will be calculated based on the contract’s total value.

Example 7:

Enterprise A in Vietnam signs with overseas enterprise B a contract to buy machinery and equipment for a cement plant project. The contract’s total value is USD 100 million, including USD 80 million worth of machinery and equipment (including equipment liable to of 10% VAT) and USD 20 million worth of installation instruction and supervision, and warranty and maintenance services.

When importing the machinery and equipment, enterprise A - the importer - has paid VAT for the VAT-liable equipment value.

Company B’s VAT payment for the value of the contract signed with enterprise A shall be determined as follows:

- VAT shall be calculated based on the service value (USD 20 million), not on the value of imported machinery and equipment.

- If the contract does not separate the value of machinery and equipment from that of services, VAT shall be calculated based on the contract’s total value (USD 100 million).

Article 7. EIT-liable incomes

1. Incomes earned by foreign contractors or subcontractors from the provision of services or services accompanying goods in Vietnam under contractor or subcontractor contracts (other than goods and services specified in Article 4, Chapter I of this Circular).

2. When goods are supplied by mode of goods delivery at a place within the Vietnamese territory; or goods are supplied together with services provided in Vietnam such as installation, trial operation, warranty, maintenance and replacement and other accompanying services (even in case accompanying services are free of charge), regardless of whether or not the provision of those services is included in the value of the goods supply contract, EIT-liable incomes of foreign contractors or subcontractors are the total value of both goods and services.

Example 8:

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

Company B’s EIT obligation with regard to the contract value shall be determined as follows:

- EIT shall be calculated separately for the machinery and equipment value (USD 80 million) and the service value (USD 20 million) at respective EIT rates in accordance with regulations.

- When the contract does not separate the value of machinery and equipment from that of services, EIT shall be calculated based on the contract’s total value (USD 100 million) at an EIT rate in accordance with regulations.

3. Foreign contractors’ or subcontractors’ incomes generated in Vietnam are incomes received in any form under foreign contractor or subcontractor contracts (other than the case of goods supply or service provision specified in Article 4, Chapter I of this Circular), regardless of the places of business activities of foreign contractors or subcontractors. Taxable incomes of foreign contractors or subcontractors in some specific cases are as follows:

- Incomes from the transfer of asset ownership or use right.

- Incomes from copyright royalties are those in any form paid for the licensing or transfer of intellectual property rights and technology transfer (including amounts paid for the licensing or transfer of author rights and work owner rights; transfer of industrial property rights; and technology transfer).

Author rights, work owner rights, industrial property rights and technology transfer are defined in the Civil Code of the Socialist Republic of Vietnam, the Law on Technology Transfer and guiding documents.

- Incomes from the transfer and liquidation of assets.

- Incomes from loan interests, which are a lender’s income earned from loans provided in any form, whether or not those loans are secured with mortgage and the lender is entitled to the borrower’s yields; incomes from deposit interests (other than those of foreigners and those arising from deposits to maintain operation in Vietnam of diplomatic missions and representative agencies of international organizations and non-governmental organizations in Vietnam), including bonuses for deposit interests (if any); incomes from interests on deferred payments under contracts; incomes from bond yields or bond price discounts (except for tax-exempt bonds); and incomes from deposit certificate interests.

Loan interests include charges payable by Vietnamese parties under loan contracts.

- Incomes from securities transfer.

- Fines and compensations received from contract breaching parties.

- Other incomes specified by law.

Section 2

VAT PAYMENT BY CREDIT METHOD, EIT PAYMENT BASED ON TURNOVER AND EXPENSE DECLARATION FOR DETERMINATION OF EIT-LIABLE INCOMES

(Below referred to as the credit and declaration methods)

Article 8. Subjects of and conditions for application

Foreign contractors and subcontractors shall pay taxes under the guidance in Section 2, Chapter II of this Circular if they fully satisfy the following conditions:

(i) Having a permanent establishment or being a resident in Vietnam;

(ii) The business duration in Vietnam under the contractor or subcontractor contract is 183 days or more from the effective date of such contract; and

(iii) Applying the Vietnamese accounting system.

Article 9. Value-added tax

VAT payment complies with the VAT Law and guiding documents.

Article 10. Enterprise income tax

EIT payment complies with the EIT Law and guiding documents.

Section 3

VAT PAYMENT BY METHOD OF CALCULATION OF TAX BASED DIRECTLY ON ADDED VALUE, EIT PAYMENT ACCORDING TO PERCENTAGE BASED ON TURNOVER

(Below referred to as the percentage assessment method)

Article 11. Subjects of and conditions for application

Vietnamese parties shall pay taxes for foreign contractors and subcontractors in case the latter is obliged to pay taxes under the guidance in Articles 12 and 13, Section 3, Chapter III of this Circular and fails to satisfy any of the conditions specified in Article 8, Section 2, Chapter II of this Circular.

Article 12. Value-added tax

Tax bases are the added value of VAT-liable services or services accompanying goods and VAT rate.

Payable VAT amount = Added value x VAT rate

1. Added value

The added value of VAT-liable services or services accompanying goods is the turnover for VAT calculation multiplied by the percentage (%) of the added value based on turnover.

a/ Turnover for VAT calculation

Turnover for VAT calculation is the total turnover received by a foreign contractor or subcontractor from the provision of VAT-liable services or services accompanying goods inclusive of payable taxes, including expenses (if any) paid by the Vietnamese party for the foreign contractor or subcontractor.

b/ Determination of turnover for VAT calculation in some specific cases:

- When, as agreed upon in the contractor or subcontractor contract, the turnover received by a foreign contractor or subcontractor is exclusive of payable VAT, the turnover for VAT calculation shall be converted into VAT-inclusive turnover and determined according to the following formula:

Example 9:

Foreign contractor A provides to a Vietnamese party the service of supervising the construction volume of cement plant Z. The contract’s VAT-exclusive and EIT-inclusive value is USD 300,000. In addition, the Vietnamese party arranges accommodations and working places for the foreign contractor’s supervisors at the cost of USD 40,000, exclusive of VAT. Under the contract, the Vietnamese party shall pay VAT for the foreign contractor. The foreign contractor’s VAT-liable turnover shall be determined as follows:

- In case a foreign contractor signs a contract with a Vietnamese or foreign subcontractor which pays taxes by the credit or declaration method, or with a foreign subcontractor which pays taxes by the combined method in order to assign part of the work value or some items stated in the contractor contract signed with the Vietnamese party and the list of Vietnamese and/or foreign subcontractors which perform the corresponding work or value items is enclosed with the contractor contract, the foreign contractor’s turnover for VAT calculation is exclusive of the value of work performed by the Vietnamese and/or foreign subcontractors.

In case a foreign contractor signs contracts with suppliers in Vietnam to buy materials, supplies, machinery and equipment for the performance of the contractor contract and goods and services for internal consumption or for purposes other than items or works it performs under the contractor contract, the value of such goods and services may not be deducted when the foreign contractor’s turnover for VAT calculation is determined.

Example 10:

Foreign contractor A signs with a Vietnamese party a contract to build cement plant Z with a total value of USD 10 million (inclusive of VAT). Under the contractor contract, foreign contractor A shall assign the installation (as provided in the contractor contract signed with the Vietnamese party) valued at USD 1 million (exclusive of VAT) to Vietnamese subcontractor B. In addition, in the course of construction of cement plant Z, for the performance of the contractor contract, foreign contractor A buys construction materials (brick, cement, sand, etc.) for construction and installation, pays charges for rented cars and hotel rooms for experts, and expenses for purchase of stationeries, etc.

In this case, foreign contractor A’s turnover for VAT calculation shall be determined as follows:

Turnover for VAT calculation = USD 10 million - USD 1 million = USD 9 million

Foreign contractor A may not deduct from this turnover for VAT calculation expenses for materials, supplies, and such goods and services as stationeries and rented cars and hotel rooms for experts, etc.

- When a subcontractor is a foreign subcontractor paying taxes by the percentage assessment method, a foreign contractor’s turnover for VAT calculation is the total turnover it receives under the contract signed with a Vietnamese party. The foreign subcontractor is not required to pay VAT for the value of work it performs under the subcontract it signs with the foreign contractor.

- For the service of international forwarding and warehousing from Vietnam to overseas (regardless of whether consignors or consignees pay service charges), the turnover for VAT calculation is the total turnover received by the foreign contractor and exclusive of international freights payable to carriers (by air or sea).

- For the service of international delivery from Vietnam to overseas (regardless of whether senders or recipients pay service charges), the turnover for VAT calculation is the total turnover received by the foreign contractor.

Example 11:

Overseas company A provides the service of delivery of postal items from overseas to Vietnam and vice versa. Company A’s turnover for VAT calculation shall be determined as follows:

+ The service of delivery from overseas to Vietnam (regardless of whether overseas senders or domestic recipients pay service charges) is not liable to VAT;

+ For the service of delivery from Vietnam to overseas (regardless of whether domestic senders or overseas recipients pay service charges), turnover for VAT calculation is the total turnover received by company A.

2. The percentage (%) of added value based on turnover for VAT calculation:

a/ The percentage (%) of added value based on turnover for VAT calculation for a number of business lines:

b/ The percentages of added value based on turnover for VAT calculation shall be determined in some specific cases as follows:

- For a contractor or subcontractor contract covering different business activities or with part of the contract value not liable to VAT, the application of the percentages of added value based on turnover for VAT calculation upon determining payable VAT shall be based on the turnover for VAT calculation of each business activity performed by the foreign contractor or subcontractor under the contractor or subcontractor contract. When it is impossible to separate the value of one business activity from another, the highest added value percentage for the business lines and the highest tax rate for the total contract value shall be applied.

Particularly for instruction and installation activities involving the supply of materials or machinery and equipment accompanying construction works, the percentage of added value based on turnover for VAT calculation is 30% of the total contract value. In case a foreign contractor signs contracts with subcontractors to assign the whole value of works or items for which materials or machinery and equipment are supplied by the construction contractor, and the foreign contractor shall only provide the remaining service value under the contractor contract, the percentage (%) of added value based on turnover for VAT calculation applicable to services (50%) shall be applied.

Example 12:

Foreign contractor A signs a contract with a Vietnamese party to construct power plant X with a value of USD 75 million (inclusive of VAT), and the contract value includes:

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

+ The value of the technological line design and other designs: USD 5 million.

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

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

+ The value of technical training and trial operation services: USD 2 million.

So, the applicable percentage of added value based on the total contract value of USD 75 million is 30%, not separately calculated for each business activity of foreign contractor A.

In case foreign contractor A signs contracts with subcontractors to assign part of the work for which materials are supplied, and it shall only provide services (for example, installation supervision and instruction services), the percentage (%) of added value based on turnover of 50% shall be applied to the value of these services.

- For a contract to supply machinery and equipment together with installation instruction, training, operation and trial operation services, if it is possible to separate the value of machinery and equipment from that of services upon determining the payable VAT amount, the percentages of added value based on each part of the contract value shall be applied. In case it is impossible to separate the value of machinery and equipment from that of services under the contract, the applicable percentage of added value based on turnover for VAT calculation is 30%.

Example 13:

Contractor H from the Republic of Korea, which does not apply the Vietnamese accounting system, signs with enterprise B in Vietnam a USD 10-million contract to supply machinery and equipment together with installation and trial operation services. If it is impossible to separate the value of machinery and equipment from that of installation and trial operation services under the contract, the applicable added value percentage is 30%.

- Turnover for VAT calculation in the case of lease of machinery, equipment and vehicles is the total rents. When the turnover from machinery, equipment and vehicle lease includes expenses directly paid by the lesser, such as those for vehicle insurance, maintenance, registry certification, machinery and equipment operators and transportation of machinery and equipment from overseas to Vietnam, the turnover for VAT calculation is exclusive of those expenses if documents evidencing the expenses are available.

3. VAT rates

VAT rates for VAT-liable goods and services are the tax rates prescribed in the VAT Law and its guiding documents.

Foreign contractors and subcontractors paying VAT according to the method of calculation of tax based directly on added value are not entitled to VAT credit for input goods and services bought for the performance of foreign contractor and subcontractor contracts (including VAT for subcontractor contracts performed by Vietnamese subcontractors).

Article 13. Enterprise income tax

Tax bases are turnover for EIT calculation and EIT rate (%) based on turnover for EIT calculation.

Payable EIT amount = Turnover for EIT calculation x EIT rate based on turnover for EIT calculation

1. Turnover for EIT calculation

a/ Turnover for EIT calculation

Turnover for EIT calculation is the total turnover exclusive of VAT and inclusive of payable taxes (if any) received by a foreign contractor or subcontractor. Turnover for EIT calculation also includes expenses (if any) paid by a Vietnamese party for a foreign contractor or subcontractor.

b/ Determination of turnover for EIT calculation in some specific cases:

- When, as agreed upon in the contractor or subcontractor contract, the turnover received by a foreign contractor or subcontractor is exclusive of payable EIT, turnover for EIT calculation shall be determined according to the following formula:

Example 14:

Foreign contractor A provides to a Vietnamese party the service of supervising the construction volume of cement plant Z. The contract’s tax-exclusive value is USD 285,000. In addition, the Vietnamese party arranges accommodations and working places for the foreign contractor’s supervisors at the cost of USD 38,000 (exclusive of VAT and EIT). Under the contract, the Vietnamese party shall pay EIT and VAT for the foreign contractor. The foreign contractor’s payable EIT shall be determined as follows:

- When a foreign contractor signs a contract with a Vietnamese or foreign subcontractor which pays taxes by the credit or declaration method, or with a foreign subcontractor which pays taxes by the combined method in order to assign part of the work value or items under the contractor contract signed with the Vietnamese party and a list of Vietnamese and/or foreign subcontractors which perform the corresponding work value or items is enclosed with the contractor contract, the foreign contractor’s turnover for EIT calculation is exclusive of the value of work performed by the Vietnamese and/or foreign subcontractors.

In case a foreign contractor signs contracts with suppliers in Vietnam to buy materials, supplies, machinery and equipment for the performance of the contractor contract and goods and services for internal consumption or for purposes other than items or works it performs under the contractor contract, the value of such goods and services may not be deducted when the foreign contractor’s turnover for EIT calculation is determined.

Example 15:

Foreign contractor A signs with a Vietnamese party a contract to build cement plant Z with a total value of USD 9 million (exclusive of VAT). Under the contractor contract, foreign contractor A shall assign the installation (as provided in the contractor contract signed with the Vietnamese party) valued at USD 1 million (exclusive of VAT) to Vietnamese subcontractor B. In addition, in the course of construction of cement plant Z, for the performance of the contractor contract, foreign contractor A buys construction materials (brick, cement, sand, etc.) for construction and installation, pays charges for rented cars and hotel rooms for experts, and expenses for purchase of stationeries, etc.

In this case, foreign contractor A’s turnover for EIT calculation shall be determined as follows:

Turnover for EIT calculation = USD 9 million - USD 1 million = USD 8 million

Foreign contractor A may not deduct from this turnover for VAT calculation expenses for materials, supplies, and such goods and services as stationeries and rented cars and hotel rooms for experts, etc.

- When a subcontractor is a foreign subcontractor paying taxes by the percentage assessment method, a foreign contractor’s turnover for EIT calculation is the total turnover it receives under the contract signed with a Vietnamese party. The foreign subcontractor is not required to pay EIT for the value of work it performs under the subcontract it signs with the foreign contractor.

- In case of lease of machinery, equipment and vehicles, turnover for EIT calculation is the total rents. When the turnover from machinery, equipment and vehicle lease includes expenses directly paid by the lesser for vehicle insurance, maintenance, registry certification, machinery and equipment operators and transportation of machinery and equipment from overseas to Vietnam, the turnover for EIT calculation is exclusive of those expenses if documents evidencing the expenses are available.

- Foreign airlines’ turnover for EIT calculation is passenger ticket sales, airway bills of lading and other incomes (other than amounts collected for the State or institutions in accordance with law) generated in Vietnam from the transportation of passengers, cargoes and other objects by flights of those airlines or joint flights.

Example 16:

Foreign airline A in the first quarter of 2013 generates a turnover of USD 100,000, including USD 85,000 from the sale of passenger tickets, USD 10,000 from the sale of bills of lading, and USD 5,000 from the sale of MCO (Miscellaneous Charge Order); it also collects for the State airport taxes worth USD 1,000 and refunds ticket-returning passengers USD 2,000.

Foreign airline A’s turnover for EIT calculation of the first quarter of 2013 shall be determined as follows:

Turnover for EIT calculation = 100,000 – (1,000 + 2,000) = USD 97,000

- A foreign shipping firm’s turnover for EIT calculation is the total freights for passenger and cargo transportation and other surcharges it receives from a Vietnamese port of loading to the final port of unloading (including freights for shipments transported through intermediate ports) and/or freights collected from the transportation of cargoes between Vietnamese ports.

Freights used as a basis for calculating EIT are exclusive of freights for which EIT has been calculated at Vietnamese ports for foreign ship owners and freights paid to Vietnamese transportation enterprises for their transportation of cargoes from a Vietnamese port to an intermediate port.

Example 17:

Company A acts as an agent of foreign shipping firm X. Under the transportation agent contract, company A, on behalf of firm X, may receive cargoes to be transported overseas, issue bills of lading and collect freights.

Vietnamese enterprise B hires firm X (through company A) to transport cargoes from Vietnam to the United States at a freight of USD 100,000.

Company A hires a ship of a Vietnamese enterprise or a foreign ship to transport cargoes from Vietnam to Singapore at a freight of USD 20,000 and from Singapore, cargoes will be transported to the United States by a ship of firm X.

EIT-liable turnover of foreign shipping firm X shall be determined as follows:

EIT-liable turnover = 100,000 – 20,000 = USD 80,000

- For the service of international forwarding and warehousing from Vietnam to overseas (regardless of whether consignors or consignees pay service charges), turnover for EIT calculation is the total turnover received by the foreign contractor and exclusive of international freights paid to carriers (by air or sea).

- For the service of international delivery from Vietnam to overseas (regardless of whether senders or recipients pay service charges), turnover for EIT calculation is the total turnover received by a foreign contractor.

Example 18:

Overseas company A provides the service of delivery of postal items from overseas to Vietnam and vice versa. Company A’s turnover for EIT calculation is determined as follows:

+ The service of delivery from overseas to Vietnam (regardless of whether overseas senders or domestic recipients pay service charges) is not liable to EIT;

+ For the service of delivery from Vietnam to overseas (regardless of whether domestic senders or overseas recipients pay service charges), turnover for EIT calculation is the total turnover received by company A.

- For reinsurance business, turnover for EIT calculation shall be determined as follows:

+ For the ceding of reinsurance to overseas, turnover for EIT calculation is the charge for ceding reinsurance to overseas receivable by a foreign contractor (including reinsurance commission and amount refunded to clients as agreed upon).

+ For the undertaking of reinsurance from overseas, turnover for EIT calculation is the reinsurance ceding commission received by a foreign contractor.

Specific provisions on taxes applicable to insurance services comply with the Ministry of Finance’s separate guidance.

- For the transfer of securities, turnover for EIT calculation shall be determined as follows:

+ Total sales of securities, bonds or deposit certificates at the time of transfer, for the transfer of securities, bonds (other than tax-exempt bonds) or deposit certificates.

Specific provisions on tax policies applicable to securities activities comply with the Ministry of Finance’s separate guidance.

- Turnover for EIT calculation for interest rate swap transactions is the difference between the receivable interest and the payable interest received by a foreign contractor in a calendar year. A tax period according to calendar year shall be determined in accordance with the EIT Law, the Tax Administration Law and guiding documents.

Example 19:

Bank A (A) has extended a loan worth USD 10 million with a fixed interest rate of 5.2%/month. The contract performance duration is 3 years from February 1, 2012, to February 1, 2015. The interest shall be paid once every six months at the beginning of each period.

Based on its loan contract, A negotiates with an overseas bank B (B) for the performance of an interest rate swap contract, specifically:

- The contract performance duration is 3 years from February 1, 2012, to February 1, 2015. The interest shall be paid once every six months at the beginning of each period.

- The floating interest rate payable by A to B is LIBOR + 0.25% and B has to pay interests to A at the fixed interest rate of 5.2%. This means that if the interest rate of LIBOR + 0.25% is higher than the fixed interest rate under the swap contract, B may receive an interest rate difference from A which is calculated as follows: (LIBOR + 0.25%) - payable interest calculated at the rate of 5.2%. On the contrary, if the interest rate of LIBOR + 0.25% is lower than the fixed interest rate under the swap contract, A may receive an interest rate difference from B which is calculated as follows: 5.2% - interest receivable by A calculated at the rate of LIBOR + 0.25%.

B’s turnover for EIT calculation shall be determined as follows:

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

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

- In 2014 (from January 1, 2014 to December 31, 2014): B will receive nothing but shall pay to A an amount of USD 5,000 (turnover for tax calculation = 0);

- In 2015: Because it is agreed upon in the contract that payment shall be made at the beginning of each period, no clearing payment will be made between A and B.

Specific provisions on tax policies applicable to derivative financial services comply with the Ministry of Finance’s separate guidance.

2. EIT rate (%) based on turnover for EIT calculation

a/ EIT rate (%) based on turnover for EIT calculation for business lines:

b/ EIT rate (%) based on turnover for EIT calculation in some specific cases:

- For a contractor or subcontractor contract covering different business activities, the application of EIT rates based on turnover for EIT calculation upon determining payable EIT shall be based on EIT-liable turnover of each business activity performed by the foreign contractor or subcontractor under the contract. When it is impossible to separate the value of one business activity from another, the highest EIT rate for the business lines shall be applied for the total contract value.

Particularly for instruction and installation activities involving the supply of materials or machinery and equipment accompanying construction works by the construction and installation contractor, the EIT rate (%) based on turnover for EIT calculation is 2% of the total contract value. In case a foreign contractor signs contracts with subcontractors to assign the whole value of works or items for which materials or machinery and equipment are supplied by the construction contractor, and the foreign contractor shall only provide the remaining service value under the contractor contract, the EIT rate (%) based on turnover for EIT calculation applicable to services (5%) shall be applied.

Example 20:

Foreign contractor A signs a contract with a Vietnamese party to construct power plant X with a value of USD 75 million (inclusive of VAT but inclusive of EIT), and the contract value includes:

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

+ The value of the technological line design and other designs: USD 5 million.

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

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

+ The value of technical training and trial operation services: USD 2 million.

So, the applicable percentage of EIT with regard to the total contract value of USD 75 million is 2%, not separately calculated for each business activity of foreign contractor A.

In case foreign contractor A signs contracts with subcontractors to assign part of works for which materials are supplied, and it shall only provide services (for example, installation supervision and instruction services), the EIT rate (%) of 5% shall be applied to this service value.

- For a contract to supply machinery and equipment together with installation instruction, training, operation and trial operation services, if it is possible to separate the value of machinery and equipment from that of services, tax rates shall be applied separately for each part of the contract value. When it is impossible to separate the value of machinery and equipment and that of services, the EIT rate of 2% based on turnover for EIT calculation shall be applied.

Example 21:

Foreign contractor A signs with a Vietnamese party a contract to provide machinery and equipment worth USD 70 million. The contract value includes:

+ The value of machinery and equipment provided for the work: USD 60 million

+ The value of technology line design and other designs: USD 5 million

+ The value of installation supervision and instruction services: USD 3 million

+ The value of technical training and trial operation services: USD 2 million.

When it is possible to separate the value of machinery and equipment from that of these services, the EIT rate shall be applied as follows: the machinery and equipment value is subject to the rate for trade; the value of designing, installation supervision, training and trial operation services is subject to the rate for services.

When it is impossible to separate those values, the EIT rate of 2% shall be applied for the total contract value (USD 70 million).

Section 4

VAT PAYMENT BY CREDIT METHOD AND EIT PAYMENT ACCORDING TO PERCENTAGE (%) BASED ON TURNOVER

(Below referred to as the combined method)

Article 14. Subjects of and conditions for application

Foreign contractors and subcontractors that fully satisfy the two conditions (i) and (ii) specified in Article 8, Section 2, Chapter II of this Circular and organize accounting in accordance with the accounting law and the Ministry of Finance’s guidance may register with tax offices to pay VAT by the credit method and pay EIT according to percentage (%) based on turnover for tax calculation.

Article 15. Value-added tax

VAT payment complies with the guidance in Article 9, Section 2, Chapter II of this Circular.

Article 16. Enterprise income tax

EIT payment complies with the guidance in Article 13, Section 3, Chapter II of this Circular.

Section 5

PROVISIONS ON TAX DECLARATION AND PAYMENT

Article 17. Tax declaration and payment in different cases

1. Foreign contractors and subcontractors that currently perform tax obligations by one of the three methods guided in Chapter II of this Circular shall continue to declare and pay taxes by such method until the expiration of their contracts.

2. If signing new contractor or subcontractor contracts in Vietnam before the expiration of old contractor or subcontractor contracts, foreign contractors or subcontractors that currently perform tax obligations by one of the three methods guided in Chapter II of this Circular shall continue to declare and pay taxes under new contractor or subcontractor contracts by the method they have applied under the old contractor or subcontractor contracts.

3. In case new contractors or subcontractor contracts are signed or performed when old contractor or subcontractor contracts have been completed, foreign contractors and subcontractors may re-register to apply one of the three tax payment methods guided in Chapter II of this Circular for new contracts.

4. In case a foreign contractor or subcontractor performs many contracts at the same time, if a contract fully satisfies the prescribed conditions and the foreign contractor or subcontractor registers to pay taxes by the credit method, declaration method or combined method, taxes shall be paid for other contracts (including contracts not satisfying the conditions) by the method registered by the foreign contractor or subcontractor for application.

5. In case foreign contractors or subcontractors that supply goods and/or provide services for prospecting, exploring, developing and exploiting oil and gas mines pay VAT by the method of calculation of tax based directly on added value, Vietnamese parties shall credit and pay VAT at the prescribed rate for these contractors or subcontractors.

In case foreign contractors or subcontractors that supply goods and/or provide services for prospecting, exploring, developing and exploiting oil and gas mines pay VAT by the credit method: When making payments to these contractors or subcontractors which have not been granted tax registration certificates by tax offices for VAT declaration and payment by the credit method, Vietnamese parties shall credit and pay VAT at the prescribed rate for them. In case foreign contractors or subcontractors have been granted tax registration certificates, they shall declare and pay VAT by the credit method for turnover they receive after receiving such certificates. VAT amounts paid by Vietnamese parties for foreign contractors or subcontractors at the prescribed rate must not be cleared against the latter’s payable VAT amounts, and at the same time these foreign contractors or subcontractors may not credit input VAT amounts arising before they are granted tax registration certificates.

Example 22:

In January 2013, foreign contractor A signs with a Vietnamese party a contract worth USD 1 million to provide petroleum drilling services. During the period of having no tax registration certificate for VAT payment by the credit method, contractor A has an input VAT amount of USD 5,000 for goods and services purchased for the contract performance. By the deadline for the Vietnamese party to make a payment of USD 100,000 (inclusive of VAT but exclusive of EIT) to contractor A, the former shall credit VAT for contractor A based on the percentage of 70% of added value based on turnover for tax calculation applicable to petroleum drilling services and at the rate of 10%. As a result, the VAT amount payable by the Vietnamese party for foreign contractor A is USD 7,000.

On May 1, 2013, foreign contractor A registers with a tax office to declare and pay VAT by the credit method and is granted a tax registration certificate. On May 15, 2013, the Vietnamese party makes a further payment of USD 200,000 to contractor A and contractor A issues an added value invoice to the Vietnamese party for the VAT amount of USD 20,000 (USD 200,000 x 10%), of which the input VAT amount arising in the period from May 1, 2013, to May 15, 2013, is USD 2,000. So, the VAT amount payable by foreign contractor A is USD 18,000 (USD 20,000 - USD 2,000). Foreign contractor A may not credit the input VAT amount of USD 5,000 arising before May 1, 2013.

Chapter III

ORGANIZATION OF IMPLEMENTATION

Article 18. Effect

1. This Circular takes effect 45 days after its signing, and replaces the Ministry of Finance’s Circular No. 134/2008/TT-BTC of December 31, 2008, guiding the performance of tax obligations applicable to foreign institutions and individuals doing business in Vietnam or earning incomes in Vietnam, Circular No. 197/2009/TT-BTC of October 9, 2009, supplementing Circular No. 134/2008/TT-BTC, and Circular No. 64/2010/TT-BTC of April 22, 2010, amending and supplementing Circular No. 134/2008/TT-BTC.

2. For contractor contracts or subcontractor contracts signed before the effective date of this Circular, the identification of VAT and EIT obligations continues to comply with relevant legal documents effective at the time of contract signing, except the following cases:

- For goods and services provided by foreign contractors or subcontractors and not liable to VAT in accordance with the VAT Law before its effective date of January 1, 2009, but are liable to VAT as from January 1, 2009, turnover for VAT calculation of foreign contractors or subcontractors shall be determined under the guidance provided in this Circular.

Example 23:

In 2008, enterprise A in Vietnam signed with overseas enterprise B a contract to buy machinery and equipment for a cement plant project. The total value of the contract was USD 100 million, including the USD-80 million value of machinery and equipment (which are domestically unavailable) and the USD-20 million value of installation instruction and supervision, maintenance and warranty services.

Under the VAT Law which took effect on January 1, 2009, machinery and equipment which are domestically unavailable and imported to form fixed assets of enterprise A are not liable to VAT. In 2009, enterprise A imported machinery and equipment under the contract signed with enterprise B and aid VAT at the stage of importation. In this case, turnover for VAT calculation of the foreign contractor (enterprise B) shall be determined in accordance with Article 6, Section 1, Chapter II of this Circular.

- For incomes paid on January 1, 2009, or afterward to foreign contractors or subcontractors being businesspersons, the income tax obligation shall be performed in accordance with the law on personal income tax.

- For contractor contracts or subcontractor contracts on the provision of services not liable to VAT or EIT or loan contracts under which loan interests are not liable to EIT in accordance with the Ministry of Finance’s Circular No. 169/1998/TT-BTC of December 22, 1998, but are now liable to VAT and EIT, this Circular shall apply as from March 1, 2012.

- For contractor contracts or subcontractor contracts which currently apply the percentage (%) of VAT based on turnover for VAT calculation provided in previous relevant circulars which is higher than that provided in this Circular, the percentage provided in this Circular shall be applied as from March 1, 2012.

- The percentage (%) of EIT based on turnover for EIT calculation provided in this Circular shall be applied for contracts on the provision of restaurant, hotel and casino management services as from March 1, 2012.

3. In case a treaty which the Socialist Republic of Vietnam has signed or acceded to contains provisions on payment of taxes by foreign contractors or foreign subcontractors different from the guidance provided in this Circular, such treaty prevails.

Any problems arising in the course of implementation should be reported by business units and establishments to the Ministry of Finance for timely settlement.-

For the Minister of Finance
Deputy Minister
DO HOANG ANH TUAN