The government has moved to provide added clarity to the complicated world of foreign contractors’ tax regulations. Vision & Associates partner Luu Tien Ngoc examines the changes and shows how foreign contractors can stay ahead of the curve.
Foreign contractors face a new reality when it comes to tax issues in Vietnam. The changes are included in the Ministry of Finance’s (MoF) Circular No.60/2012/TT-BTC, on April 12, 2012 providing guidance for implementation of tax obligations applicable to foreign organisations, individuals doing business in Vietnam or having incomes in Vietnam (Circular 60). Circular 60 took effect 45 days after the issuance and replaced Circular No.134/2008/TT-BTC, dated December 31, 2008, on the same matter (Circular 134).
In general, Circular 60 introduces a number of clarifications, if compared with Circular 134, by providing examples where the identification of tax obligations applicable to foreign organisations, individuals doing business in Vietnam or having incomes in Vietnam (known as foreign contractor tax or FCT) is complicated. In addition to better responding to the new situation, amendments and/or supplementations in Circular 60 better cope with recently issued tax-related laws, including the Corporate Income Tax Law (CIT Law), Value-Added Tax Law (VAT Law) and Tax Management Law (TM Law).
It is noted that Circular 60 refers all provisions of its implementation to other regulations issued by the MoF for implementation of the TM Law. As a result, it simplifies most of its provisions related to the registration, declaration, payment and finalisation of the FCT by either foreign sub/contractors or its resident Vietnamese counterparts. In this regard, we note that the MoF just issued Circular No.80/2012/TT-BTC, dated May 22, 2012, guiding for the implementation of the TM Law (Circular 80), which will take effect from July 1, 2012.
We have highlighted the key amendments and/or supplementations of Circular 60 if compared with Circular 134:
Application scope and subject. In addition to foreign organisations or individuals doing business in Vietnam or having incomes in Vietnam (“Foreign Sub/Contractor”), the circular extends its application to foreign organisations or individuals supplying commodities in Vietnam in the form of either on-site exports (except for processing activities with re-export of commodities to foreign organisations or individuals) and have incomes based on the contracts signed between them and their counterparts in Vietnam or Delivered Duty Paid (“DDP”), Delivered At Terminal (“DAT”) or Delivered At Place (“DAP”), in accordance with Incoterms.
Exemption. Circular 60 clarifies cases where FCT exemption is applicable. According to which, internet-based and on-line services (including advertisement, marketing and training) which are provided outside Vietnam, by foreign organisations or individuals to Vietnamese organisations or individuals, will no longer be exempted from the FCT. It is noted that for the first time, the definition of the “territory of Vietnam”, for the purpose of identification of the FCT obligation, is provided clearly by Circular 60.
Tax payment methods. Similar to Circular 134 and subject to the full satisfaction of the three conditions (including being resident in Vietnam, the time for doing business in Vietnam exceeds 183 days, and applying the Vietnamese accounting regime) as provided by Circular 60, the Foreign Sub/Contractors can decide the FCT payment in the form of either tax declaration and deduction (i.e. paying the value-added tax (“VAT”) following the deduction method and the Corporate Income Tax (“CIT”) on the basis of declaration of revenue and expenditures for determination of taxable income, if they fully satisfy all conditions) or tax rate fixation (i.e. paying the VAT on the basis of and the CIT at the rates imposed on, the determined value-added revenue, through their resident Vietnamese counterpart, if they fail to satisfy one of the said conditions), which are similar to the tax payment methods as provided by Circular 134. However, under Circular 60 the Foreign Sub/Contractors have one more choice (which may be referred to as the mixed method), i.e. paying the VAT following the deduction method (the same as applicable to the first method). But, the CIT is at rates imposed on the determined value-added revenue the same as applicable to the second method, if the Foreign Sub/Contractors satisfy the first two conditions.
Tax rate fixation. While the percentages of added value, for the purpose of determination of the FCTaxable revenue, remain unchanged for all sectors (including 50 per cent for services, equipment leases, insurance, 30 per cent for construction including associated materials and equipment, 50 per cent for construction excluding associated materials and equipment and 30 per cent for transportation, production and other business), Circular 60 just separates the specific oil and gas drilling services from the general services.
The FCT taxable revenue for oil and gas drilling services is now 70 per cent instead of 50 per cent as applicable to the general services and at the same time refers the ground for determination of the FCT taxable revenues in some specific service sectors, including insurance, securities and financial derivative services, to some specific regulations to be issued by the MoF.
It is noted that the rates of Value-Added Tax (VAT) applicable to each type of services (i.e. 0 per cent, 5 or 10 per cent of the FCT taxable revenue) will be generally provided by the VAT law. The more amendments by Circular 60 are seen in the rates of CIT imposed on the determined FCT taxable revenue, which are particularly as the chart shows.
Tax registration. Thanks to the reference made to Circular 80, the 20 working day time limit for the FCT registration from the date of signing contract between the Foreign Sub/Contractor and its resident Vietnamese counterpart, is removed from Circular 60. Instead of that, it is required by Circular 80 that the FCT registration must be made within 10 working days from the date on which the FCT obligations arise.
Other considerable notes. Except for some cases as specifically provided by Circular 60, with respect to all contracts signed before the effective date of Circular 60, the identification and determination of the FCT obligations for the Foreign Sub/Contractor will continue to be in accordance with the regulations effective as at the date of the contract signing.
We do hope that with a number of amendments, supplementations and/or clarifications highlighted above, Circular 60 will not only ensure the more tax collections and contributions to the state budget, but also better facilitate the FCT registration, declaration, payment and finalisation in Vietnam by the Foreign Sub/Contractors and/or its resident Vietnamese counterparts.