Foreign contractors are 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). FCT is not a separate tax, but typically comprises a combination of value added tax (VAT) and corporate income tax (CIT), or personal income tax (PIT) for the income of foreign individuals.
CIT-liable income is determined based on declared total turnover and expenses.
Foreign contractors are subject to the above-listed taxes for services rendered in Vietnam, but this does not include the pure supply of goods, services performed and consumed outside Vietnam, and other services performed wholly outside of the country.
In other words, foreign contractors are not subject to these taxes for payments received for overseas services or services performed and consumed outside of Vietnam.
Payments that are subject to FCT include interest, royalties, service fees, leases, rentals, insurance premiums, transportation fees and so on.
No withholding tax or remittance tax is imposed on profits paid to foreign corporate shareholders. However, a withholding tax of five percent CIT applies to interest paid on loans from foreign entities. An offshore loan provided by certain governments or semi-government organizations can get an exemption from withheld tax on interest where there is double taxation agreement between Vietnam and the relevant country.
Interest paid on bonds and certification of deposit issued to foreign entities is subject to five percent withholding tax.
Three ways to calculate FCT
As an independent foreign contractor, the following three options are available for the payment of these respective taxes.
If the foreign contractor has permanent establishment status in Vietnam or if the duration of the project is greater than 182 days, and if they use the Vietnamese accounting system (VAS), the respective amounts can be deducted from total revenues.
Taxpayers should note that the Vietnamese party must inform the relevant tax authorities that the foreign contractor will use this method within 20 working days of signing the contract.
Under this method, the foreign contractor is required to pay CIT at 20 percent on its net profits. Additionally, if the contractor is involved in multiple projects in Vietnam, and uses the deduction method for one project, the contractor must use the same method for other projects as well.
Tax declarations in the case of VAT payments are calculated directly, based on added value and the CIT payments of the contractor’s turnover percentage. The Vietnamese party must withhold and pay the taxes for the foreign contractor, in addition to submitting tax declaration and finalization dossiers to the relevant tax agencies directly managing them.
Furthermore, the Vietnamese party must complete the tax registration procedures to pay the FCT on behalf of the foreign contractor, or subcontractor, within 20 working days after signing a contract.
For contractors providing goods and services for exploration, development and production of oil and gas a separate set of requirements are provided for FCT declarations.
The hybrid method allows foreign contractors to register and pay for VAT based on the deduction method, but allows for CIT to be paid under the direct method on gross turnover. This method is permitted if the foreign contractor has permanent resident status in Vietnam or operates in Vietnam under a contract with a 182-day or greater term and maintains accounting records that follow the Ministry of Finance’s relevant accounting regulations and guidelines.
In this instance, the Vietnamese party is responsible for sending the necessary notifications to the relevant tax authority in the city where the foreign contractor’s office is located within 20 working days of signing a contract.
A foreign contractor must pay FCT in one of the two methods listed below if they work as a foreign joint venture or partnership contractor with a Vietnamese party:
- The executive board of the partnership or the Vietnamese party must declare, pay for, and finalize the VAT and CIT if the parties form a cost-accounting executive board with a bank account that takes responsibility for the issuance of invoices, or if the Vietnamese party conducts accounting for, and distributes profits to, the parties; or
- The foreign contractor may declare and pay the taxes themselves by way of one of the three methods mentioned above, if the parties enter into a partnership by sharing turnover or products, or jointly undertake a contractual job with each respective party performing a separate part to determine their own respective turnover.
FCT exemptions and double tax agreements
Taxpayers should note that VAT is not applicable where goods are exempt from FCT-VAT, or where the import VAT is paid when importing.
In addition, the supply or services of the oil and gas industry are subject to a tax rate of 10 percent VAT. International transportation, computer software licenses, transfers of technology and IPRs are exempt from VAT.
In addition, CIT withholding taxes may be exempt under certain double tax agreements (DTAs). Most DTAs have a provision that allow a foreign contractor to claim a tax credit in their home country for the FCT it pays in Vietnam.
Contractors and employers should plan ahead
FCTs can be a significant part of a contract if a foreign contractor is involved in a large project. However, the contractor can choose which option is suitable for them provided they meet the required conditions.
Each method has its advantages and disadvantages, depending on the type and scale of project. While a basic guideline, foreign contractors and employers should seek professional advice prior to embarking on the specific project.
Note: The latest version of this article was published on June 11, 2019.
Source: Vietnam Briefing