Doing Business

Tax applicability tips for cross-border compliance

Trường Lăng

May 26, 2022

Doing Business

Tax applicability tips for cross-border compliance

Trường Lăng

May 26, 2022

In the globalization of Vietnam’s economy, many international business organizations have been carrying on doing cross-border business in Vietnam without establishing a subsidiary. Along with that, cross-border transactions have been a growing concern in terms of the related tax implications. With the government increasingly stepping up scrutiny on entities evading tax payments, it is imperative that foreign contractors review their documents and ensure cross-border compliance to avoid penalties and long administrative procedures. Below are some valuable tips and knowledge from Viettonkin.

Tax apllicability tips for cross-border compliance

Who is Subject to Foreign Contractor Tax?

A foreign contractor or subcontractor is subject to taxes on payments for work done in Vietnam based on the contracts signed with a Vietnamese partner in the form of the foreign contractor tax (FCT).

For foreign contractors and subcontractors, Circular 103/2014/TT-BTC on guidelines for fulfillment of tax liability of foreign entities doing business in Vietnam or earning income in Vietnam (Circular 103) is the most important and amended FCT legislation.

A foreign contractor, according to Circular 103, is a foreign entity or an individual who does business or generates income in Vietnam under an agreement between the foreign contractor and a Vietnamese party or between the foreign contractor and a foreign subcontractor. Vietnamese counter-parties may include any entity registered to do business in Vietnam, whether state, domestic, or foreign-owned. A foreign subcontractor is a foreign business or individual who offers services to a foreign contractor or performs part of a foreign contractor’s work.

In addition, other entities subject to foreign contractor tax include:

– Foreign organizations and individuals that supply goods in Vietnam in the form of on-spot import and export and generate income in Vietnam, or distribute goods in Vietnam or supply goods that the seller bears the risks related to the goods entering the Vietnamese territory.

– Foreign organizations and individuals that conduct part or all of the business of distributing goods and providing services in Vietnam, in which foreign organizations and individuals are still owners of goods delivered to a Vietnamese organization or to be responsible for the goods delivered to a Vietnamese organization or to fix the selling price of the goods or the price of providing services;

– Foreign organizations and individuals that, through Vietnamese organizations and individuals, negotiate and sign contracts in the name of those foreign organizations and individuals.

– Foreign organizations and individuals that exercise the right to export, import, distribute in the Vietnamese market, purchase goods for export, and sell goods to Vietnamese traders.

What are the Tax Obligations of Foreign Contractors?

To clarify, FCT is not a separate tax, but typically comprises a combination of value added tax (VAT) and corporate income tax (CIT) for foreign organizations, or personal income tax (PIT) for the income of foreign individuals. For other taxes, fees and charges, foreign contractors and foreign subcontractors must comply with current legal documents on taxes, fees and other charges.

To calculate and pay FCT in Vietnam, foreign contractors can choose one of the given three options: declaration method, direct method (withholding tax), or mix method. Each calculation has its pros and cons, and not all of them are applied to all foreign contractors. Foreign contractors must meet the criteria set out within each method and only choose one method for their FCT calculation.

Because of its administrative advantages over other ways, the direct method is the most often used payment method by foreign contractors. Under this method, foreign contractors are not required to pay FCT directly to the Vietnam tax authority—the Vietnamese contracting party is required to withhold and file the FCT upon payments made to the foreign contractor, at the deemed percentage of taxable revenue. 

The method of determining foreign contractor tax is also different, based on the transaction content of the parties, including:

  • Calculation of contractor tax according to NET price;
  • Calculate contractor tax according to GROSS price;
  • Calculate contractor tax from intermediary payment fee;
  • Calculate contractor tax from compensation;
  • Calculate contractor tax from administration system fee, transmission line.

Cross-Border Compliance

Register for FCT:

  • Foreign contractors and foreign subcontractors that register to pay FCT directly with tax authorities will be granted a 10-digit tax code according to each contract.
  • Foreign contractors and foreign subcontractors whose tax is declared and paid by the Vietnamese party on behalf of the contractor shall be granted a 13-digit tax code according to the tax code paid on behalf of the Vietnamese party to certify the fulfillment of FCT obligation in Vietnam.
  • Time limit for FCT registration: the deadline for contractor tax registration with business units is 20 days from the contract’s signing date.

Contractor tax declaration:

Time of declaration:

  • Declaration according to the time of arising: Tax declaration for the case of payment of VAT calculated directly on VAT, payment of CIT at the % calculated on turnover is the type of declaration according to the time of payment of money to foreign contractors and declare settlement at the end of the contractor contract.
  • Monthly declaration: In case the Vietnamese party makes payments to the foreign contractor several times a month, it can register for a monthly tax declaration instead of declaring each time payment to the foreign contractor is incurred.

Deadline for submitting FCT declaration:

  • According to each time of arising: the 10th day from the date of arising tax liability.
  • By month: the 20th day of the month following the month in which the tax liability arises.

Finalization of foreign contractor tax:

Time limit for submission of tax finalization declaration dossiers:

  • The contractor must complete the submission no later than the 45th day from the date of termination of the contractor contract.

Payment of FCT, VAT & CIT:

Time limit for paying contractor tax:

  • No later than the last day of the deadline for submitting the declaration.
  • In case the last day of the time limit coincides with a holiday as prescribed, the last day of the time limit shall be counted as the next working day of that rest day.

Penalties for Non-Compliance

Late payment from 01 to 05 daysWarning for late payment behavior
Late payment from 01 to 10 daysA fine of 700,000 VNDIf there are extenuating/aggravating circumstances, the fine ranges from 400,000 to 1,000,000
Late payment from 10 to 20 daysA fine of 1,400,000 VNDIf there are extenuating/aggravating circumstances, the fine ranges from 800,000 to 2,000,000 VND
Late payment from 20 to 30 daysA fine of 2,100,000 VNDIf there are extenuating/aggravating circumstances, the fine ranges from 1,200,000 to 4,000,000 VND
Late payment from 40 to 90 daysA fine of 2,800,000 VNDIf there are extenuating/aggravating circumstances, the fine ranges from 2,000,000 to 5,000,000 VND
Penalties for non cross-border compliance

Things to consider

Some issues have not been mentioned and clearly specified in the law, so guidance from authorities is required, for example:

  • When the company signs a contract with a foreign supplier to purchase software copyright and product design services (software services not included), if the contract cannot separate the value of copyright and services, how will the FCT rate apply for other services (software services not included)?
  • The business buys goods delivered outside of Vietnam, and the design and processing of certificates of origin is done outside of Vietnam. The contract separates the value of products and the value of services. Is FCT applicable to the value of goods delivered outside Vietnam but without services in Vietnam? Is FCT applicable to the aforementioned overseas services?

Another point to note is that the Vietnamese General Department of Taxation has started to understand the difficulties of foreign contractors when doing business in Vietnam and is trying to reduce the volume of paperwork by issuing regulations,and reducing the complicated administrative procedure for taxpayers, in order to encourage international cooperation and to attract foreign investment to Vietnam. However, the side effect of updating and changing regulations continuously is that it causes confusion for taxpayers, who are not able to follow and adopt the new laws in a timely manner. With the help of a reputable consulting firm like Viettonkin, rest assured that your business will receive detailed and dedicated instructions to save time and avoid unnecessary fines when it comes to cross-border compliance in Vietnam. Contact us now!

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