As mentioned in our post SENDING EMPLOYEES OVER TO VIETNAM, it is a preferable option for foreign service suppliers to send their employees over to perform contracted services at clients’ hub in Vietnam without establishment of business presence. Thanks to globalization of trade and commerce, cross-border service supply has never been such easier and more convenient. The only matter that requires attention is that employees who are sent to Vietnam shall comply with regulation on personal income tax, what about tax obligations on foreign service suppliers? Withholding tax, which consists of VAT and corporate income tax (CIT), should be the obligation in this case.
Along with above case, the entities subject to withholding tax should be generally classified as follows:
- Foreign business organizations having permanent establishments in Vietnam or not; foreign business individuals that are residents of Vietnam or not (shortly called foreign contractors and foreign sub-contractors) who do business in Vietnam or earn income in Vietnam under contracts, agreements, or commitments between the foreign contractor and a Vietnamese entity or between a foreign contractor and a foreign sub-contractor to perform part of the main contract.
- Foreign entities providing goods in Vietnam in the form of domestic export and earn income in Vietnam under contracts between them and Vietnamese companies (except for cases in which goods are processed and then returned to foreign entities) or distributing goods in Vietnam or providing goods under Incoterms rules that require the sellers to be responsible for goods that have been taken into Vietnam’s territory.
- Any foreign entity that performs the whole or part of goods distribution or service provision in Vietnam, who is still the owner of goods that are delivered to Vietnamese organizations or takes responsibility for the cost of distribution, advertising, marketing, quality of goods/services delivered to Vietnamese organizations, or imposes prices (including the cases in which the foreign entity authorities or hires some Vietnamese organization to perform part of the distribution or service provision pertaining to goods sale in Vietnam).
- Any foreign entity that negotiates or concludes contracts via a Vietnamese entity.
- Any foreign entity that exercises its right to export, import, distribute goods in Vietnam, buy goods to export, or sell goods to Vietnamese traders in accordance with trading laws.
There are 3 methods for tax calculation; however, this post focuses on the method applicable to the more common case of foreign enterprises performing service in Vietnam under service supply agreements with Vietnamese enterprises without establishment of business presence. Direct method or paying withholding tax upon fixed rate should be the applicable one. Also, since foreign enterprises establishes no business presence in Vietnam, the Vietnamese parties shall withhold an amount equal to payable withholding tax and pay to tax authority on behalf of the foreign enterprises.
In relation to VAT, it is stipulated that services and goods provided in Vietnam by foreign contractors and subject to VAT under Vietnamese laws and regulations on VAT shall be subject to VAT of withholding tax. Services and goods subject to VAT are those used for production, trading, and consumption in Vietnam (including those purchased from overseas organizations and individuals). Direct method with formula is simply provided as follows:
|Payable VAT||=||Income subject to VAT||x||VAT rate|
In which, VAT rate applicable to service is 5%
In relation to CIT, direct method shall be applied to the case with the following formula:
|CIT payable||=||Incomes subject to CIT||x||CIT rate|
In which, CIT applicable to service is 5%.
It is noteworthy that income derived from service contract shall be taxed in accordance with both Vietnamese laws and the laws of the State/territory of which the service suppliers are incorporated. Fortunately, Vietnam has, up to present, concluded the agreement on avoidance of double taxation with 75 States/territories, which allows a deduction equal to the CIT amount paid in Vietnam for service suppliers from above-mentioned 75 States/territories when they pay income tax back in home countries (if any). Such deduction will not exceed the income tax (as calculated before the deduction is given) which is attributable to the taxable income in their home countries.
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