What is withholding tax? Subjects of withholding tax 2021

Withholding tax is the tax that foreign contractors or sub-contractors must pay when doing business in Vietnam. Thus, what is withholding tax? Who are the objects of withholding tax?

What is withholding tax?

Withholding tax is applicable to individuals, and organizations (foreign contractors or sub-contractors) when doing profitable business in Vietnam in accordance with legal regulations:

Type of tax:

Subjects of withholding tax

Pursuant to Article 1 of the Circular No. 103/2014/TT-BTC, the guidance in this Circular is applicable to the following subjects:

1.  Foreign business organizations with or without permanent establishments in Vietnam; foreign businesspeople who are residents or nonresidents 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 in 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.

For example:

- Case 1:  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.

In this case, enterprise X is governed by Circular No. 103/2014/TT-BTC and enterprise B shall declare, withhold and pay tax on behalf of enterprise X in accordance with this Circular No. 103/2014/TT-BTC.

- 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 the Circular No. 103/2014/TT-BTC

3. Foreign organizations and individuals that perform some or all of the 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).

For example: 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 name contracts via Vietnamese organizations or individuals.

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

Subjects not applicable to withholding tax governed by Circular 103

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 a 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 at 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 a warranty).

For example, 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 the Circular 103

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

For example: 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.

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

- Repair of aircraft, aircraft engines, 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);

For example: 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;

For example: 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);

For example: In the case of company A in Vietnam signs a contract with University B of Singapore for the 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 another enterprise.