Circular No. 60/2012/TT-BTC guiding the implementation of tax obligations applicable to foreign organizations and individuals conducting business in Vietnam or earning income in Vietnam.

CIRCULAR

Guidelines for the fulfillment of tax obligations applicable to foreign organizations and individuals conducting business in Vietnam or earning income in Vietnam

conducting business in Vietnam or earning income in Vietnam

_______________________

 

Pursuant to the Value Added Tax Law No. 13/2008/QH12 dated June 3, 2008; Government Decree No. 123/2008/NĐ-CP dated December 8, 2008 detailing and guiding certain provisions of the Value Added Tax Law; Government Decree No. 121/2011/NĐ-CP dated December 27, 2011 amending and supplementing certain provisions of Government Decree No. 123/2008/NĐ-CP dated December 8, 2008 detailing and guiding the implementation of certain provisions of the Value Added Tax Law;

Pursuant to the Enterprise Income Tax Law No. 14/2008/QH12 dated June 3, 2008; Government Decree No. 124/2008/NĐ-CP dated December 11, 2008 detailing and guiding the implementation of certain provisions of the Enterprise Income Tax Law; Government Decree No. 122/2011/NĐ-CP dated December 27, 2011 amending and supplementing Government Decree No. 124/2008/NĐ-CP dated December 11, 2008 detailing and guiding the implementation of certain provisions of the Enterprise Income Tax Law;

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

Pursuant to Decree No. 118/2008/NĐ-CP dated November 27, 2008 of the Government stipulating the functions, tasks, powers, and organizational structure of the Ministry of Finance;

Considering the proposal of the Director General of the State Tax Administration;

The Ministry of Finance issues this Circular guiding the fulfillment of tax obligations applicable to foreign organizations and individuals conducting business in Vietnam or generating income in Vietnam as follows:

PART I

GENERAL PROVISIONS

Article 1. Scope of application

The guidelines set forth in this Circular apply to the following entities (except those specified in Article 4 Chapter I of this Circular):

1. Foreign organizations conducting business with a permanent establishment in Vietnam or without a permanent establishment in Vietnam; foreign individual businesses that are residents in Vietnam or not residents in Vietnam (hereinafter collectively referred to as foreign contractors, foreign subcontractors) conducting business in Vietnam or generating income in Vietnam based on contracts, agreements, or commitments between foreign contractors and Vietnamese organizations or individuals or between foreign contractors and foreign subcontractors to perform part of the contractor's work.

2. Foreign organizations supplying goods in Vietnam under the form of direct import-export transactions and generating income in Vietnam based on contracts signed between foreign organizations and Vietnamese enterprises (excluding processing and exporting goods to foreign organizations) or supplying goods under terms such as DDP, DAT, DAP (International Commercial Terms - Incoterms).

Example 1:

Case 1: Enterprise X from abroad signs a contract to purchase fabric from Enterprise A in Vietnam, while designating Enterprise A to deliver the goods to Enterprise B in Vietnam (under the form of direct import-export transactions as prescribed by law). Enterprise X generates income in Vietnam based on the contract signed between Enterprise X and Enterprise B (Enterprise X sells fabric to Enterprise B).

In this case, Enterprise X is subject to the provisions of this Circular and Enterprise B has the responsibility to declare, deduct, and pay taxes on behalf of Enterprise X according to the provisions of this Circular.

Case 2: Enterprise Y from abroad signs a contract for fabric processing with Enterprise C in Vietnam, while designating Enterprise C to deliver the goods to Enterprise D in Vietnam for further production (under the form of direct import-export transactions as prescribed by law). Enterprise Y generates income in Vietnam based on the contract signed between Enterprise Y and Enterprise D (Enterprise Y sells goods to Enterprise D).

In this case, Enterprise Y is subject to the provisions of this Circular and Enterprise D has the responsibility to declare, deduct, and pay taxes on behalf of Enterprise Y according to the provisions of this Circular.

Case 3: Enterprise Z from abroad signs a contract for fabric processing or purchasing fabric with Enterprise E in Vietnam (Enterprise Z provides raw materials to Enterprise E for processing) and designates Enterprise E to deliver the goods to Enterprise G in Vietnam for further processing (under the form of direct import-export processing as prescribed by law). After processing, Enterprise G exports the goods back to Enterprise Z and Enterprise Z must pay processing fees to Enterprise G according to the processing contract.

In this case, Enterprise Z does not fall within the scope of application of this Circular.

Article 2. Taxpayer

1. Foreign contractors, foreign subcontractors ensuring the conditions stipulated in Article 8 Section 2 Chapter II or Article 14 Section 4 Chapter II of this Circular, conducting business in Vietnam or earning income in Vietnam, including mainland territory, islands, inland waters, territorial seas, and airspace above them, exclusive economic zones, including the seabed and subsoil thereof, over which Vietnam exercises sovereignty, sovereign rights, and jurisdiction in accordance with Vietnamese law and international law. Business operations are conducted based on contractor contracts with Vietnamese organizations or individuals or with other foreign organizations operating in Vietnam based on subcontractor contracts.

The determination of whether foreign contractors, foreign subcontractors have a permanent establishment in Vietnam or are residents in Vietnam shall be carried out in accordance with the Enterprise Income Tax Law, the Personal Income Tax Law, and the implementing regulations.

In cases where a Double Taxation Agreement signed by the Socialist Republic of Vietnam provides different provisions regarding permanent establishments and residents, such provisions shall be implemented in accordance with the Agreement.

2. Organizations established and operating under Vietnamese law, organizations registered to operate under Vietnamese law, other organizations, and individuals engaged in production and business purchasing services, services attached to goods, or paying income generated in Vietnam based on contractor contracts or subcontractor contracts (hereinafter collectively referred to as Vietnamese Parties) include:

- Enterprises established under the Enterprise Law, the State-Owned Enterprise Law (now the Enterprise Law), the Law on Investment by Foreign Organizations and Individuals in Vietnam (now the Investment Law), and the Cooperative Law;

- Economic organizations of political organizations, socio-political organizations, social organizations, occupational social organizations, armed units, public service organizations, and other organizations;

- Oil and gas contractors operating under the Law on Oil and Gas;

- Branches of foreign companies authorized to operate in Vietnam;

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

- Ticket sales offices and agents in Vietnam of foreign airlines with the right to transport to and from Vietnam, either directly or jointly;

- Organizations or individuals engaged in marine transportation services for foreign shipping companies; agents in Vietnam of foreign freight forwarders and express delivery companies;

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

- Other organizations in Vietnam;

- Individuals producing and trading in Vietnam.

The taxpayer shall be responsible for withholding the amount of VAT and corporate income tax as stipulated in Section 3, Chapter II of this Circular before settling payments to foreign contractors or subcontractors.

Article 3. Types of taxes applicable

1. Foreign contractors and subcontractors that are business organizations shall fulfill their obligations regarding value-added tax (VAT) and corporate income tax according to this Circular.

2. Foreign contractors and subcontractors that are foreign individuals engaged in business activities shall fulfill their obligations regarding VAT according to this Circular and personal income tax according to the laws on personal income tax.

3. For other types of taxes, fees, and charges, foreign contractors and subcontractors shall comply with current legal documents on taxes, fees, and charges.

Article 4. Non-applicable entities

The guidelines in this Circular do not apply to:

1. Foreign organizations and individuals conducting business in Vietnam as prescribed by the Investment Law, the Law on Oil and Gas, and the Law on Credit Institutions.

2. Foreign organizations and individuals providing goods to Vietnamese organizations and individuals without accompanying services being performed in Vietnam in the following forms:

- Delivery at the border post of another country: the seller bears all responsibilities, costs, and risks related to export and delivery at the border post of another country; the buyer bears all responsibilities, costs, and risks related to receiving the goods and transporting them from the border post of another country to Vietnam.

- Delivery at the Vietnamese border post: the seller bears all responsibilities, costs, and risks related to the goods up to the point of delivery at the Vietnamese border post; the buyer bears all responsibilities, costs, and risks related to receiving the goods and transporting them from the Vietnamese border post.

3. Foreign organizations and individuals earning income from services provided and consumed outside Vietnam.

Example 2:

Company H of Hong Kong provides cargo handling services at the port in Hong Kong for the international shipping fleet of Company A in Vietnam. Company A must pay Company H the fee for cargo handling services at the port in Hong Kong.

In this case, the cargo handling service at the Hong Kong port is a service provided and consumed in Hong Kong, thus not subject to taxation in Vietnam.

Example 3:

Foreign organizations providing specialized services, management, bond issuance, legal advisory, custodian agency, and organizing roadshows (an activity within the brand activation sector) for Company A in Vietnam in countries where Company A issues Global Depositary Receipts (GDRs) and international bonds, these services carried out by foreign organizations are not subject to the provisions of this Circular.

4. Foreign organizations and individuals providing the following services to Vietnamese organizations and individuals, where the services are performed abroad:

- Repair of transportation means (aircraft, aircraft engines, aircraft parts, ships), machinery, equipment (including submarine cables, transmission equipment), including or excluding spare parts and replacement equipment;

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

Example 4:

A Vietnamese enterprise enters into a contract with an organization in Singapore to perform product advertising services in the Singapore market, then the advertising service of the Singapore organization does not fall under the scope of application of this Circular. If the organization in Singapore performs product advertising services for consumption in the Vietnamese market via the internet, then the income from such advertising services falls under the scope of application of this Circular.

- Investment and trade promotion;

- Brokerage: selling goods, providing services abroad;

Example 5:

A Vietnamese enterprise enters into a contract with a company in Thailand to perform brokerage services to sell its products in the Thai market or the global market, then the brokerage service of the Thai company does not fall under the scope of application of this Circular; if a Vietnamese enterprise enters into a contract with a company in Thailand to perform brokerage services to transfer real estate of the Vietnamese enterprise in Vietnam, then the brokerage service falls under the scope of application of this Circular.

- Training (excluding online training);

Example 6:

A Vietnamese company enters into a contract with University B in Singapore for Vietnamese employees to study at University B in Singapore, then the training service of University B does not fall under the scope of application of this Circular; if a Vietnamese company enters into a contract with University B in Singapore for University B to provide online training for Vietnamese employees in Vietnam, then the online training service of University B falls under the scope of application of this Circular.

- Dividing international postal and telecommunications service charges between Vietnam and other countries where these services are performed outside Vietnam; foreign satellite transmission and bandwidth leasing services as stipulated by the Postal Law and Telecommunications Law.

Article 5. Concepts used in this Circular

In this Circular, the following terms are understood 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.

A Subcontractor includes a foreign Subcontractor and a Vietnamese Subcontractor.

3. The territory of Vietnam includes the mainland territory, islands, internal waters, territorial sea, airspace above it, exclusive economic zone beyond the territorial sea, including the seabed and subsoil of the seabed over which Vietnam exercises sovereignty, sovereign rights, and jurisdiction in accordance with Vietnamese law and international law.

Chapter II

BASIS AND METHOD OF CALCULATING TAX

Section 1

OBJECTS SUBJECT TO VAT AND INCOME SUBJECT TO ENTERPRISE INCOME TAX

Article 6. Objects subject to VAT

1. Services or services attached to goods subject to VAT provided by foreign Contractors and foreign Subcontractors based on Contractor Contracts and Subcontractor Contracts for production, business, and consumption in Vietnam (excluding goods and services specified in Article 4 of Chapter I of this Circular), including:

- Services or services attached to goods subject to VAT provided by foreign Contractors and foreign Subcontractors in Vietnam and consumed in Vietnam;

- Services or services attached to goods subject to VAT provided outside Vietnam and consumed in Vietnam.

2. In cases where goods are supplied under a contract in the form of: the place of delivery of goods within the territory of Vietnam; or the supply of goods accompanied by services carried out in Vietnam such as installation, trial operation, warranty, maintenance, replacement, other accompanying services with the supply of goods, including cases where the provision of the aforementioned services is included or not included in the value of the goods supply contract, then the value of the goods only bears import VAT according to regulations, the value of services subject to VAT shall be taxed according to the guidance in this Circular. In cases where the contract cannot separately identify the value of goods and accompanying service value (including cases where accompanying services are free of charge), VAT is calculated on the entire contract value.

Example 7:

Enterprise A in Vietnam signs a contract to purchase a cement plant machinery equipment assembly line from Enterprise B abroad. The total contract value is 100 million USD, including the value of machinery and equipment at 80 million USD (of which there is equipment subject to VAT with a rate of 10%), and the value of installation guidance, installation supervision, warranty, maintenance services is 20 million USD.

When importing the machinery equipment assembly line, Enterprise A, as the importer, pays import VAT on the value of imported equipment subject to VAT.

The determination of Enterprise B's VAT liability for the contract signed with Enterprise A is as follows:

- VAT is calculated on the value of services (20 million USD), excluding the value of the imported machinery equipment assembly line.

- In cases where the contract cannot separately identify the value of the machinery equipment assembly line and the value of services, VAT is calculated on the entire contract value (100 million USD).

Article 7. Taxable Income for Corporate Income Tax (TNDN)

1. The income of foreign contractors and subcontractors arising from the provision of services and services attached to goods in Vietnam based on contractor contracts and subcontractor contracts (excluding goods and services specified in Article 4, Chapter I of this Circular).

2. In cases where goods are provided in the form of: the delivery point located within the territory of Vietnam; or the provision of goods accompanied by services carried out in Vietnam such as installation, trial operation, warranty, maintenance, replacement, and other accompanying services (including cases where the accompanying services are free of charge), regardless of whether the aforementioned services are included in the value of the goods supply contract or not, the taxable income of foreign contractors and subcontractors shall be the entire value of the goods and services.

Example 8:

Company A in Vietnam signed a contract with Company B abroad to purchase a production line of machinery and equipment for the Cement Plant Project. The total contract value is 100 million USD (excluding VAT), including the value of machinery and equipment at 80 million USD, and the value of guidance installation, supervision installation, warranty, and maintenance services at 20 million USD.

The corporate income tax liability of Company B for the contract value is determined as follows:

- Corporate income tax is calculated separately for the value of imported machinery and equipment (80 million USD) and separately for the value of services (20 million USD) according to the prescribed tax rates.

- If the contract cannot separately identify the value of machinery and equipment and the value of services, corporate income tax will be calculated on the total contract value (100 million USD) at the prescribed tax rate.

3. The income generated in Vietnam of foreign contractors and subcontractors is any income received based on contractor contracts and subcontractor contracts (excluding the provision of goods and services specified in Article 4, Chapter I of this Circular), irrespective of the location of business operations of foreign contractors and subcontractors. The taxable income of foreign contractors and subcontractors in specific cases is as follows:

- Income from transferring ownership or usage rights of assets.

- Income from royalties is any income received under any form for the right to use, transfer ownership of intellectual property, and technology transfer (including payments for the right to use, transfer author's rights and work owner's rights; transfer of industrial property rights; technology transfer).

"Author's rights, work owner's rights", "Industrial property rights", "Technology transfer" are defined in the Civil Code of the Socialist Republic of Vietnam, the Law on Technology Transfer, and guiding documents for implementation.

- Income from the sale or liquidation of assets.

- Income from interest on loans: is the income of the lender from loans of any form, whether or not the loan is secured by collateral, and whether or not the lender receives interest from the borrower; income from interest on deposits (excluding interest on deposits of foreign individuals and interest on deposits arising from accounts maintained in Vietnam for the operation of diplomatic missions, representative offices of international organizations, and non-governmental organizations in Vietnam), including any bonuses accompanying deposit interest (if any); income from late payment interest as stipulated in contracts; income from bond interest, bond discount (excluding exempt bonds); income from certificate of deposit interest.

Loan interest includes all fees that the Vietnamese party must pay according to the contract.

- Income from the sale of securities.

- Penalties and compensation obtained from the defaulting partner in breach of contract.

- Other income as prescribed by law.

Section 2

PAYING VALUE ADDED TAX (VAT) BY THE DEDUCTION METHOD, PAYING CORPORATE INCOME TAX BASED ON

DECLARATION OF REVENUE AND EXPENSES TO DETERMINE TAXABLE INCOME

(hereinafter referred to as the deduction method, declaration method)

Article 8. Objects and Conditions for Application

Foreign Contractors and Subcontractors shall pay taxes according to the guidelines set out in Section 2, Chapter II of this Circular if they meet the following conditions:

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

(ii) The duration of business operations in Vietnam under the Contractor Contract or Subcontractor Contract is 183 days or more from the date the Contractor Contract or Subcontractor Contract becomes effective;

(iii) Applying Vietnamese accounting regulations.

Article 9. Value Added Tax

Implemented in accordance with the provisions of the Law on Value Added Tax and guiding documents for its implementation.

Article 10. Corporate Income Tax

Implemented in accordance with the provisions of the Law on Corporate Income Tax and guiding documents for its implementation.

Section 3

PAY TAXES USING THE DIRECT CALCULATION METHOD ON VALUE ADDED,

PAY CORPORATE INCOME TAX AT A RATE BASED ON REVENUE

(hereinafter referred to as the fixed rate method)

Article 11. Objects and Conditions for Application

The Vietnamese Party shall pay tax on behalf of the Foreign Contractor and Foreign Subcontractor in cases where the Foreign Contractor and Foreign Subcontractor pay taxes according to the guidelines set out in Article 12 and Article 13 of Section 3, Chapter II of this Circular if the Foreign Contractor and Foreign Subcontractor fail to meet any of the conditions specified in Article 8 of Section 2, Chapter II of this Circular.

Article 12. Value Added Tax

The basis for calculating tax is the value added of services and services attached to goods subject to VAT and the VAT rate.

 

 

1. Value Added

The value added of services and services attached to goods subject to VAT is determined by multiplying the taxable revenue by the percentage of VAT calculated on revenue.

a) Taxable Revenue:

Taxable revenue is the total revenue from providing services and services attached to goods subject to VAT that the Foreign Contractor and Foreign Subcontractor receive, not deducting taxes payable, including expenses paid by the Vietnamese Party on behalf of the Foreign Contractor and Foreign Subcontractor (if any).

b) Determination of Taxable Revenue in Specific Cases:

- In cases where the revenue received by the Foreign Contractor and Foreign Subcontractor does not include VAT payable as agreed in the Contractor Contract or Subcontractor Contract, the taxable revenue must be converted to revenue inclusive of VAT and determined according to the following formula:

 

 

Example 9:

Foreign Contractor A provides construction supervision service for Cement Plant Z to the Vietnamese Party, with the contract price excluding VAT (but including corporate income tax) being 300,000 USD. Additionally, the Vietnamese Party arranges accommodation and work for the management staff of Foreign Contractor A at a cost of 40,000 USD excluding VAT. According to the Contract, the Vietnamese Party is responsible for paying VAT on behalf of Foreign Contractor A. The determination of the taxable revenue of Foreign Contractor A is as follows:

Determination of Taxable Revenue:

 

 

- In cases where the Foreign Contractor enters into a contract with a Vietnamese Subcontractor or a foreign Subcontractor to pay tax using the deduction method, declaration method, or mixed method to subcontract part of the work value or item specified in the Contractor Contract signed with the Vietnamese Party and the list of Vietnamese Subcontractors and foreign Subcontractors performing the corresponding work or item listed in the Contractor Contract, the taxable revenue of the Foreign Contractor does not include the value of the work performed by the Vietnamese Subcontractor or foreign Subcontractor.

In cases where the Foreign Contractor signs contracts with suppliers in Vietnam to purchase raw materials, machinery, equipment to implement the Contractor Contract and goods, services for internal consumption, which are not included in the items or works that the Foreign Contractor performs under the Contractor Contract, the value of these goods and services shall not be deducted when determining the taxable revenue of the Foreign Contractor.

Example 10:

Foreign Contractor A signs a construction contract for Cement Plant Z with the Vietnamese Party with a total contract value of 10 million USD (inclusive of VAT). According to the Contractor Contract, Foreign Contractor A will subcontract part of the installation value (as specified in the Contractor Contract signed with the Vietnamese Party) to Vietnamese Subcontractor B with a value of 1 million USD (exclusive of VAT); additionally, during the construction of Cement Plant Z to fulfill the Contractor Contract, Foreign Contractor A purchases raw materials (bricks, cement, sand...) for installation and buys various goods and services such as renting vehicles, hotels for experts, purchasing office supplies... to support the execution of the contract.

The taxable revenue of Foreign Contractor A in this case is determined as follows:

Taxable Revenue = 10 million USD - 1 million USD = 9 million USD

The taxable revenue of Foreign Contractor A does not include deductions for raw materials, goods, and services such as vehicle rentals, hotel bookings for experts, and office supply purchases.

- In cases where the Subcontractor is a foreign Subcontractor paying tax using the fixed rate method, the taxable revenue of the Foreign Contractor is the entire revenue received by the Foreign Contractor according to the contract signed with the Vietnamese Party. The foreign Subcontractor does not need to pay VAT on the value of the work performed by the foreign Subcontractor as stipulated in the Subcontractor Contract signed with the Foreign Contractor.

- For international freight forwarding and warehousing services from Vietnam to abroad (regardless of whether the sender or recipient pays for the service), the taxable revenue is the entire revenue received by the Foreign Contractor without including the international shipping fees paid to the carrier (airline, sea).

- For international courier services from Vietnam to abroad (regardless of whether the sender or recipient pays for the service), the taxable revenue is the entire revenue received by the Foreign Contractor.

Example 11:

Company A from abroad provides postal service for sending and receiving mail between abroad and Vietnam. The taxable revenue of Company A is determined as follows:

+ For international courier services from abroad to Vietnam (regardless of whether the sender is from abroad or the recipient in Vietnam pays for the service), such services are not subject to VAT;

+ For international courier services from Vietnam to abroad (regardless of whether the sender is in Vietnam or the recipient abroad pays for the service), the turnover subject to VAT is the entire revenue received by Company A;

2. The percentage rate of VAT calculated on taxable turnover:

a) The percentage rate of VAT calculated on taxable turnover for various business sectors:

 

 

b) Determining the percentage rate of value-added tax calculated on taxable turnover for specific cases:

- For contractor contracts and subcontractor contracts that include multiple business activities or where part of the contract value is not subject to VAT, the application of the percentage rate of VAT calculated on taxable turnover when determining the amount of VAT payable shall be based on the taxable turnover of each business activity carried out by foreign contractors or subcontractors according to the terms of the contractor or subcontractor contract. In cases where it is not possible to separately identify the value of each business activity, the highest VAT rate applicable to the industry and the highest tax rate shall be applied to the entire contract value.

Specifically, for construction and installation activities that include the provision of raw materials or machinery and equipment, the percentage rate of value-added tax calculated on taxable turnover is 30% of the total contract value. If a foreign contractor enters into contracts with subcontractors to transfer all parts of the work or items that include the provision of raw materials or machinery and equipment, and the foreign contractor only performs the remaining service value under the contractor contract, then the percentage rate of VAT calculated on taxable turnover shall be applied at the service sector rate (50%).

Example 12:

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

+ Value of machinery and equipment provided for the project: 50 million USD.

+ Value of design for production lines and other designs: 5 million USD.

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

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

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

Therefore, the percentage rate of VAT applicable to the entire contract value of 75 million USD is 30%, without separate calculation for each business activity provided by foreign contractor A.

If foreign contractor A enters into contracts with subcontractors to transfer parts of the work that include the provision of raw materials, and foreign contractor A only performs the service value (such as the value of supervision and installation guidance services), then this service value applies a VAT rate of 50%.

- For contracts providing machinery and equipment accompanied by installation guidance, training, operation, and trial run services, if the value of machinery and equipment and the value of these services can be separately identified when determining the amount of VAT payable, the VAT rate shall be applied to each portion of the contract value. If the contract does not separately identify the value of machinery and equipment and the value of these services, the VAT rate on taxable turnover is 30%.

Example 13:

South Korean foreign contractor H, who does not follow Vietnamese accounting practices, signed a contract with company B in Vietnam for the supply of production lines and equipment accompanied by installation, operation, and trial run services with a value of 10,000,000 USD. If the contract does not separately identify the value of machinery and equipment and the value of installation, operation, and trial run services, the VAT rate applied is 30%.

The taxable turnover for VAT in the case of leasing machinery, equipment, and transportation means is the entire rental fee. If the rental income for machinery, equipment, and transportation means includes costs directly paid by the lessor such as insurance for the means, maintenance, inspection certification, operator fees, and transportation costs of machinery and equipment from abroad to Vietnam, these costs are excluded from the taxable turnover for VAT if there is actual documentation to prove them.

3. VAT rate

The VAT rate for goods and services subject to VAT is the rate prescribed in the Law on VAT and implementing regulations.

Foreign contractors and foreign subcontractors subject to VAT under the direct method of calculating VAT are not entitled to deduct VAT on purchased goods and services (including VAT on subcontracts performed by Vietnamese subcontractors) used to fulfill contractor and subcontractor contracts.

Article 13. Corporate Income Tax

The basis for calculating tax is the taxable turnover for Corporate Income Tax and the percentage rate of Corporate Income Tax on the taxable turnover.

 

 

1. Taxable turnover for Corporate Income Tax

a) Taxable turnover for Corporate Income Tax

The taxable turnover for Corporate Income Tax includes all turnover excluding VAT that foreign contractors and subcontractors receive, without deducting taxes payable. The taxable turnover for Corporate Income Tax also includes expenses paid by the Vietnamese party on behalf of foreign contractors and subcontractors (if any).

b) Determination of the taxable turnover for Corporate Income Tax in certain specific cases:

- In the case where, according to the contractor agreement or subcontractor agreement, the turnover received by the foreign contractor or subcontractor does not include Corporate Income Tax payable, then the taxable turnover for Corporate Income Tax is determined using the following formula:

 

 

Example 14:

Foreign Contractor A provides construction supervision services for cement plant Z to the Vietnamese party at a contract price excluding VAT, with Corporate Income Tax at 285,000 USD. Additionally, the Vietnamese party arranges accommodation and work facilities for foreign contractor's management staff at a value of 38,000 USD (excluding VAT, Corporate Income Tax). According to the Contract, the Vietnamese party is responsible for paying Corporate Income Tax and VAT on behalf of the foreign contractor. The determination of the Corporate Income Tax payable by the foreign contractor is as follows:

Determination of Taxable Revenue:

- In the case where the foreign contractor enters into a contract with a Vietnamese subcontractor or a foreign subcontractor to pay tax under the deduction method, declaration method, or mixed method to transfer part of the project value or item specified in the contractor agreement signed with the Vietnamese party and the list of Vietnamese subcontractors and foreign subcontractors performing corresponding work or items listed in the contractor agreement, the taxable turnover for Corporate Income Tax of the foreign contractor does not include the value of work performed by the Vietnamese subcontractor or foreign subcontractor.

In the case where the foreign contractor signs contracts with suppliers in Vietnam to purchase raw materials, machinery, equipment to implement the contractor agreement and goods, services for internal consumption, which are not part of the work or items specified in the contractor agreement, the value of these goods and services shall not be deducted when determining the taxable turnover for Corporate Income Tax of the foreign contractor.

Example 15:

Foreign Contractor A signs a construction contract for cement plant Z with the Vietnamese party with a total contract value of 9 million USD (price excluding VAT). According to the contractor agreement, Foreign Contractor A will transfer part of the installation value (as specified in the contractor agreement signed with the Vietnamese party) to Vietnamese Subcontractor B at a value of 1 million USD (price excluding VAT); additionally, during the construction of cement plant Z to implement the contractor agreement, Foreign Contractor A purchases raw materials (bricks, cement, sand...) for installation and buys various goods and services such as renting vehicles, hotels for experts, purchasing office supplies... to serve the implementation of the contract.

The taxable turnover for Corporate Income Tax of Foreign Contractor A in this case is determined as follows:

Taxable turnover for Corporate Income Tax = 9 million USD - 1 million USD = 8 million USD

The taxable turnover for Corporate Income Tax of Foreign Contractor A does not include costs for raw materials, goods, and services such as vehicle rental, hotel rental for experts, and purchasing office supplies.

- In the case where the subcontractor is a foreign subcontractor who pays tax under the fixed rate method, the taxable turnover for Corporate Income Tax of the foreign contractor is the entire turnover received by the foreign contractor according to the contract signed with the Vietnamese party. The foreign subcontractor does not have to pay Corporate Income Tax on the value of work performed according to the subcontractor agreement signed with the foreign contractor.

- The taxable turnover for Corporate Income Tax in the case of leasing machinery, equipment, transportation means is the entire lease revenue. In the case where the lease revenue for machinery, equipment, transportation means includes direct costs paid by the lessor such as insurance for the means, maintenance, inspection certification, personnel operating the means, and machinery, and transportation costs for machinery and equipment from abroad to Vietnam, the taxable turnover for Corporate Income Tax does not include these costs if there is actual evidence.

- The taxable turnover for Corporate Income Tax of foreign airlines is the revenue from selling passenger tickets, airway bills, and other revenues (excluding those collected on behalf of the state or organizations as prescribed by law) in Vietnam for transporting passengers, cargo, and other objects carried out on their own flights or joint ventures.

Example 16:

In the first quarter of 2013, foreign airline A generated a turnover of 100,000 USD, including 85,000 USD from passenger ticket sales, 10,000 USD from cargo airway bill sales, and 5,000 USD from MCO (negotiable receipt) sales; simultaneously, it generated a collection on behalf of the state (airport fee) of 1,000 USD and a refund due to passenger ticket returns of 2,000 USD.

The taxable turnover for Corporate Income Tax of foreign airline A in the first quarter of 2013 is determined as follows:

Taxable turnover for Corporate Income Tax = 100,000 - (1,000 + 2,000) = 97,000 USD

- The taxable turnover for Corporate Income Tax of foreign shipping companies is the entire freight revenue obtained from passenger transport, cargo transport, and additional charges earned from Vietnamese ports to the final port unloading the cargo (including freight for consignments that must be transshipped through intermediate ports) and/or freight revenue earned from transporting cargo between Vietnamese ports.

Freight revenue serving as the basis for calculating Corporate Income Tax does not include freight already subject to Corporate Income Tax at Vietnamese ports for foreign ship owners and freight paid to Vietnamese transport enterprises for participating in the transport of goods from Vietnamese ports to intermediate ports.

Example 17:

Company A acts as an agent for Overseas Shipping Company X. According to the agency transportation contract, Company A represents Company X to accept goods for export, issue bills of lading, and collect freight charges...

Enterprise B of Vietnam hires Overseas Company X (through Company A) to transport goods from Vietnam to the United States with a transportation fee of 100,000 USD.

Company A has chartered a ship from a Vietnamese enterprise or an overseas shipping company to carry goods from Vietnam to Singapore at a transportation fee of 20,000 USD, and from Singapore, the goods will be transported to the United States by Company X's ships.

The taxable income subject to Corporate Income Tax of Overseas Shipping Company X is determined as follows:

Taxable income = 100,000 - 20,000 = 80,000 USD

- For international cargo handling and warehousing services from Vietnam to foreign countries (regardless of whether the sender or recipient pays for the service), the taxable income for Corporate Income Tax is the total revenue received by the foreign contractor excluding the international transportation fees paid to the carrier (air or sea).

- For international express delivery services from Vietnam to foreign countries (regardless of whether the sender or recipient pays for the service), the taxable income for Corporate Income Tax is the total revenue received by the foreign contractor.

Example 18:

An overseas company A provides international postal service for sending and receiving mail between overseas and Vietnam. The taxable income for Corporate Income Tax of Company A is determined as follows:

+ For international express delivery services from overseas to Vietnam (regardless of whether the sender in overseas or the recipient in Vietnam pays for the service), it does not constitute taxable income for Corporate Income Tax;

+ For international express delivery services from Vietnam to overseas (regardless of whether the sender in Vietnam or the recipient in overseas pays for the service), the taxable income for Corporate Income Tax is the total revenue received by Company A.

- For reinsurance, the taxable income for Corporate Income Tax is determined as follows:

+ For the activity of ceding reinsurance abroad, the taxable income for Corporate Income Tax is the amount of reinsurance premium ceded abroad that the foreign contractor receives (including reinsurance commission and costs for compensating customers according to agreements).

+ For the activity of accepting reinsurance from abroad, the taxable income for Corporate Income Tax is the amount of reinsurance commission received by the foreign contractor.

Specific regulations on tax policy for insurance services shall be implemented in accordance with separate guidelines issued by the Ministry of Finance.

- For securities transfer, the taxable income for Corporate Income Tax is determined as follows:

For the transfer of securities, bonds (excluding exempted bonds), deposit certificates, the taxable income for Corporate Income Tax is the total revenue from selling securities, bonds, and deposit certificates at the time of transfer.

Specific regulations on tax policy for securities activities shall be implemented in accordance with separate guidelines issued by the Ministry of Finance.

- The taxable income for Corporate Income Tax for interest rate swap transactions is the difference between interest receivable and interest payable that the foreign contractor receives within a calendar year. The determination of the tax period according to the calendar year is carried out in accordance with the Law on Corporate Income Tax, the Law on Tax Administration, and related guiding documents.

Example 19:

Bank A (A) has a loan amounting to 10 million USD with a fixed interest rate of 5.2% per month. The contract period is three years from February 1, 2012 to February 1, 2015, with payments due every six months at the beginning of each period.

Based on the loan agreement of A, A negotiates with an overseas bank B (B) to implement an interest rate swap contract, specifically:

- The contract period is three years from February 1, 2012 to February 1, 2015, with payments due every six months at the beginning of each period.

- The floating interest rate that A must pay to B is LIBOR + 0.25%, and B must pay A a fixed interest rate of 5.2%. This means if the LIBOR + 0.25% rate is higher than the fixed rate under the swap contract, B receives the interest rate differential from A calculated as: (LIBOR + 0.25%) - interest payable at the 5.2% rate. Conversely, if the LIBOR + 0.25% rate is lower than the fixed rate under the swap contract, A receives the interest rate differential from B calculated as: 5.2% - interest received at the LIBOR + 0.25% rate.

 

 

The determination of taxable income for Corporate Income Tax for B is as follows:

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

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

- Year 2014 (from January 1, 2014 - December 31, 2014): B does not receive money but must pay A 5,000 USD (Taxable income = 0);

- Year 2015: As the contract stipulates payment at the beginning of the period, there is no settlement between A and B.

Specific regulations on tax policy for derivative financial services shall be implemented in accordance with separate guidelines issued by the Ministry of Finance.

2. Percentage (%) corporate income tax rate on taxable income

a) Percentage (%) corporate income tax rate on taxable income for specific industries:

 

 

b) Percentage (%) corporate income tax rate on taxable income for certain specific cases:

- For contracts with contractors and subcontractors involving multiple business activities, the application of the corporate income tax rate based on taxable revenue to determine the amount of corporate income tax payable shall be based on the taxable corporate income tax revenue for each business activity carried out by foreign contractors and foreign subcontractors according to the contract provisions. In cases where it is not possible to separately identify the value of each business activity, the corporate income tax rate applicable to the business sector with the highest corporate income tax rate shall be applied to the entire contract value.

Specifically, for construction and installation activities that include the provision of materials or equipment, the corporate income tax rate based on taxable revenue is 2% of the total contract value. If a foreign contractor enters into a contract with subcontractors to transfer all parts of the work or items including the provision of materials or equipment, and the foreign contractor only performs the remaining service value under the main contract, the corporate income tax rate based on taxable revenue shall be applied at the rate for the service industry (5%).

Example 20:

Foreign Contractor A enters into a contract with the Vietnamese Party to construct an electricity plant X with a value of 75 million USD (excluding VAT but including corporate income tax), the contract value includes:

+ Value of machinery and equipment provided for the project: 50 million USD.

+ Value of design for production lines and other designs: 5 million USD.

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

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

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

Thus, the corporate income tax rate applicable to the entire contract value of 75 million USD is 2%, without separate calculation for each business activity provided by Foreign Contractor A.

If Foreign Contractor A enters into a contract with subcontractors to transfer parts of the work including the provision of materials, and Foreign Contractor A only performs the service value (such as supervision and installation guidance services), then this service value shall apply a corporate income tax rate of 5%.

- For contracts providing machinery and equipment accompanied by installation guidance services, training, operation, and testing, if the value of machinery and equipment and the value of services can be separated, taxes shall be calculated based on the respective tax rates of each part of the contract value. If the contract does not separately identify the value of machinery and equipment and the value of services, the corporate income tax rate based on taxable revenue shall be 2%.

Example 21:

Foreign Contractor A enters into a contract with the Vietnamese Party to provide a production line of machinery and equipment with a value of 70 million USD. The contract value includes:

+ Value of machinery and equipment supplied to the project: 60 million USD

+ Value of technology chain design, other designs: 5 million USD

+ Value of supervision and installation guidance services: 3 million USD

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

In cases where the value of machinery and equipment and the value of these services can be separated, the application of the corporate income tax rate shall be as follows: for the value of machinery and equipment, the rate applicable to the trade sector shall be applied; for the value of design, installation supervision, training, and trial operation services, the rate applicable to the service sector shall be applied.

In cases where separation is not possible, the corporate income tax rate of 2% shall be applied to the entire contract value (70 million USD).

Section 4

PAYING VAT BY DEDUCTION METHOD, PAYING CORPORATE INCOME TAX AT A PERCENTAGE RATE BASED ON REVENUE

(hereinafter referred to as the mixed method)

Article 14. Objectives and Conditions for Application

Foreign contractors and foreign subcontractors who meet both conditions (i) and (ii) specified in Article 8, Section 2, Chapter II of this Circular and organize accounting in accordance with laws on accounting and guidelines issued by the Ministry of Finance shall register with the tax authority to implement VAT payment by deduction method and corporate income tax payment at a percentage rate based on taxable revenue.

Article 15. Value Added Tax

Implement in accordance with the guidance provided in Clause 9 Section 2 Chapter II of this Circular

Article 16. Corporate Income Tax

Implement in accordance with the guidance provided in Clause 13 Section 3 Chapter II of this Circular

Section 5

PROVISIONS ON THE IMPLEMENTATION OF TAX DECLARATION AND PAYMENT

Article 17. Declaration and Payment of Taxes in Various Cases

1. Foreign Contractors and Subcontractors currently fulfilling their tax obligations according to one of the three methods as guided in Chapter II of this Circular must continue to declare and pay taxes according to the method they are using until the completion of the contract.

2. Foreign Contractors and Subcontractors currently fulfilling their tax obligations according to one of the three methods as guided in Chapter II of this Circular, if they continue to sign new Contractor or Subcontractor contracts in Vietnam before completing their current Contractor or Subcontractor contracts, must continue to declare and pay taxes for the new Contractor or Subcontractor contracts according to the methods applied in their previous contracts.

3. In cases where new Contractor or Subcontractor contracts are signed at a time when the previous Contractor or Subcontractor contracts have already ended, Foreign Contractors and Subcontractors may re-register the tax payment method according to one of the three methods as guided in Chapter II of this Circular for the new contracts.

4. In cases where a Foreign Contractor or Subcontractor simultaneously implements multiple contracts, if one of the contracts meets the conditions stipulated and the Foreign Contractor or Subcontractor registers to pay taxes according to the deduction method, declaration method, or mixed method, then all other contracts (including those that do not meet the conditions) must also implement tax payments according to the method registered by the Foreign Contractor or Subcontractor.

5. In cases where Foreign Contractors and Subcontractors provide goods or services to conduct exploration, development, and exploitation activities of oil and gas fields and pay VAT according to the direct calculation method on VAT, the Vietnamese party has the responsibility to withhold and pay on behalf of VAT according to the prescribed rate.

In cases where Foreign Contractors and Subcontractors provide goods or services to conduct exploration, development, and exploitation activities of oil and gas fields and pay VAT according to the deduction method: During the period when the Foreign Contractor or Subcontractor has not yet been issued a tax registration certificate by the tax authority to declare and pay VAT according to the deduction method, if the Vietnamese party pays money to the Foreign Contractor or Subcontractor, the Vietnamese party has the responsibility to withhold and pay on behalf of VAT according to the prescribed rate. If the Foreign Contractor or Subcontractor has been issued a tax registration certificate by the tax authority, the Foreign Contractor or Subcontractor has the responsibility to declare and pay VAT according to the deduction method for income generated from the date of issuance of the tax registration certificate. The amount of VAT paid on behalf of the Foreign Contractor or Subcontractor by the Vietnamese party according to the non-deductible rate will not be offset against the VAT payable by the Foreign Contractor or Subcontractor, and the Foreign Contractor or Subcontractor will not be able to deduct input VAT incurred prior to obtaining the tax registration certificate.

Example 22:

In January 2013, Foreign Contractor A signed a contract with the Vietnamese party regarding the provision of oil and gas drilling services with a contract value of 1 million USD. During the period when Foreign Contractor A had not yet been issued a tax registration certificate by the tax authority to pay VAT according to the deduction method, Foreign Contractor A incurred input VAT of 5000 USD for goods and services purchased to fulfill the contract. When the Vietnamese party reached the payment deadline for paying 100,000 USD (inclusive of VAT but exclusive of corporate income tax) to Foreign Contractor A, the Vietnamese party was responsible for withholding VAT for Foreign Contractor A at a rate of 70% of the taxable revenue from oil and gas drilling services, with a tax rate of 10%. Therefore, the amount of VAT that the Vietnamese party paid on behalf of Foreign Contractor A was 7000 USD.

By May 1, 2013, Foreign Contractor A registered and received a tax registration certificate from the tax authority and began declaring and paying VAT according to the deduction method. On May 15, 2013, the Vietnamese party made another payment of 200,000 USD to Foreign Contractor A, who issued a VAT invoice to the Vietnamese party for 20,000 USD (200,000 USD x 10%). Input VAT incurred from May 1 to May 15, 2013, was 2000 USD. The amount of VAT that Foreign Contractor A must pay is 18,000 USD (20,000 USD - 2000 USD). Foreign Contractor A cannot deduct the 5000 USD of input VAT incurred before May 1, 2013.

The VAT invoice for the Vietnamese party with the VAT amount being 20,000 thousand USD (200,000 USD x 10%), the input VAT arising from May 1, 2013 to May 15, 2013 is 2,000 USD. The VAT amount that Foreign Contractor A must pay is 18,000 USD (20,000 USD - 2,000 USD). Foreign Contractor A is not allowed to deduct 5,000 USD of input VAT arising before May 1, 2013.

Chapter III

IMPLEMENTATION

Article 18. Effective Date

1. This Circular takes effect 45 days from the date of signature, replacing Circular No. 134/2008/TT-BTC dated December 31, 2008, issued by the Ministry of Finance guiding the implementation of tax obligations applicable to foreign organizations and individuals conducting business or earning income in Vietnam, Circular No. 197/2009/TT-BTC dated October 9, 2009, issued by the Ministry of Finance supplementing Circular No. 134/2008/TT-BTC, and Circular No. 64/2010/TT-BTC dated April 22, 2010, issued by the Ministry of Finance amending and supplementing Circular No. 134/2008/TT-BTC.

2. In cases where Contracts and Subcontracts were signed before the effective date of this Circular, the determination of VAT and corporate income tax obligations shall continue to be implemented according to the guidance provided in the corresponding legal documents at the time of signing the contract, except for the following situations:

- For goods and services exempted from VAT under the VAT Law in effect before January 1, 2009, provided by Foreign Contractors and Subcontractors, starting from January 1, 2009, they become subject to VAT. The determination of taxable revenue for VAT for Foreign Contractors and Subcontractors shall be carried out according to the guidance provided in this Circular.

Example 23:

In 2008, Enterprise A in Vietnam signed a contract to purchase a production line of machinery and equipment for the Cement Plant Project with Enterprise B from abroad. The total value of the contract was 100 million USD, including the value of machinery and equipment (which were not yet produced domestically) at 80 million USD, and the value of installation guidance services, installation supervision, warranty, and maintenance services at 20 million USD.

According to the Value Added Tax (VAT) law in effect before January 1, 2009, production lines of machinery and equipment that were not yet produced domestically and imported to form fixed assets of enterprises were exempt from VAT. In 2009, Enterprise A imported machinery and equipment belonging to the production line according to the contract signed with Enterprise B and paid import VAT. In this case, the turnover subject to VAT for the foreign Contractor (Enterprise B) shall be determined in accordance with Article 6, Section 1, Chapter II of this Circular.

- For income received by foreign Contractors and subcontractors who are individual businesses from January 1, 2009 onwards, they shall fulfill their personal income tax obligations in accordance with the law on personal income tax.

- For contracts of Contractors and subcontractors providing services that were previously not subject to VAT, corporate income tax, or loan contracts that were previously not subject to corporate income tax on interest payments as stipulated in Circular No. 169/1998/TT-BTC dated December 22, 1998 of the Ministry of Finance, now subject to VAT and corporate income tax as stipulated in this Circular, such contracts shall be governed by the provisions of this Circular from March 1, 2012.

- For contracts of Contractors and subcontractors applying a higher percentage rate of corporate income tax based on taxable turnover as stipulated in previous Circulars compared to the rate in this Circular, the rate in this Circular shall apply from March 1, 2012.

- The percentage rate of corporate income tax based on taxable turnover for contracts providing hotel management, hotel, and casino services shall be applied in accordance with the provisions of this Circular from March 1, 2012.

3. In cases where international treaties to which the Socialist Republic of Vietnam is a party provide for the payment of taxes by foreign Contractors and subcontractors differently from the guidelines set out in this Circular, such treaties shall be followed.

During implementation, if there are any difficulties, units and business establishments are advised to report them to the Ministry of Finance for timely resolution./.