Official Dispatch No. 1664/TCT-HTQT of October 11, 1994, Re: Guidance for implementation of treaties for avoidance of double taxation.

• Số hiệu: 1664/TCT-HTQT
• Loại văn bản: Công văn
• Nơi ban hành: Bộ Tài chính, Tổng cục Thuế
• Người ký: Nguyễn Đức Huy
• Ngày ban hành: 11/10/1994

THE GENERAL DEPARTMENT OF TAX -------	SOCIALIST REPUBLIC OF VIET NAM Independence - Freedom - Happiness ----------
No. 1664/TCT-HTQT Re.: Guidance for implementation of  treaties for avoidance of double taxation	Hanoi, October 11, 1994.

To : Department of Taxes of provinces and cities under the central authority

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Pursuant to the contents provided in the Treaties and in exercising the powers provided for in paragraph 1, Article 3 of the Treaties;

The General Department of Taxes hereby explains and provides guidance for implementation of the Treaties as follows :

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I. SCOPE OF APPLICATION :

Pursuant to the provisions of Article 1,2 and paragraph 1(a) and 1(b) of Article 3 of the Treaties for avoidance of double taxation, the scope of application covers :

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2. All entities comprising individuals, companies, enterprises or any organizations considered as a company or an enterprise (from a tax point of view) etc. which are subject to taxation in accordance with provisions of tax laws of Vietnam as well as tax laws of other Contracting States.

3. A Treaty only has effect within the national territories of Vietnam and the other Contracting State.

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The Treaties for avoidance of double taxation which Vietnam has signed with other countries generally comprise 30 Articles. In certain Treaties, there may be a Protocol or Exchange of Notes attached to the Treaty to explain the content of a number of provisions in the Treaty if such provisions require greater detail.

The protocol forms a part of the Treaty and has the same legal binding as other provisions of the Treaty. The Exchange of Notes is of lower legal standing which may be amended or added without following the procedures for Treaty amendment and addition.

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1. Article 1 and Article 2 contain provisions which specify the persons to whom the Treaty applies and the taxes it covers.

2. Article 3 contains the definition of terms used in the Treaty. Therefore, terms which may be construed differently in different provisions are to be interpreted in accordance with the meaning defined in this Article. Terms which are not defined in this Article are to be interpreted in accordance with the laws of Vietnam and laws of the other Contracting State as the context requires.

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For proper implementation, first of all determine whether a person is a resident of one of either two States i.e. determine whether or not such person is a tax resident of Vietnam or the other Contracting State. Secondly, determine the State of which such person is a resident because according to the provisions of the Treaties certain items of income are only taxable in the State of which the person is a resident or taxable in both States. However, in a State where the person is not a resident and a beneficiary, taxation is only carried out in accordance with the rate prescribed in the Treaties such as items of income specified in Article 10 "Dividends", Article 11 "Interest" and Article 12 "Royalties".

a- Where a person is an individual and is a resident of both States,  the following criteria will be used to determine whether or not such a person is a resident of Vietnam under the Treaty

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+ If the individual has a habitual abode in both States and however, has closer economic and personal relations (parents, spouse, children) with Vietnam then he will be considered as a resident of Vietnam;

+ If above situations are not considered and these individual resides permanently in Vietnam then he will be considered as a resident of Vietnam.

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b- Where an entity is a company, enterprise, association etc. (other than an individual) and is a resident of both States, the following criteria will be used to determine whether or not such entity is a resident of Vietnam;

+ If the business of such entity is incorporated or registered in Vietnam then it will be considered as resident of Vietnam;

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4. Article 5 provides the criteria for determination of permanent establishment. This is an important factor in the implementation of Treaties. Per Article 7, a foreign company is only subject to profits tax in Vietnam if it operates in Vietnam through a permanent establishment.

According to the Treaties, the term "permanent establishment" is used to refer to a fixed place through which a foreign company or enterprise carries on its business wholly or partly in Vietnam.

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a) It has in Vietnam a place of management, a branch, an office, a factory, a production plant, a mine, an oil or gas well etc. or a quarry or any other place of extraction of natural resources;

b) It has in Vietnam a building site or construction or installation project or an operation to supervise such building site or construction or installation project where it lasts more than 183 days;

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d) It has in Vietnam a person (including individual, company and any organization) acting on its behalf in the following capacities:

+ The person has the authority to enter into contracts in its name and exercises that authority on regular basis;

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e) It is carrying on a service including consultancy service in Vietnam through its employees or any other persons in Vietnam appointed by itself provided that such service lasts for a period or an aggregate of more than 183 days in 12 consecutive months;

5. Article 6 "Income from Immovable Property" provides that all income items derived from direct use and/or lease of all types of immovable property shall be subject to tax in the State where the immovable property is situated. Therefore, if an immovable property is situated in Vietnam then the income derived from such property will be chargeable to tax in Vietnam regardless the question that whether or not the beneficiary of such income is a resident of Vietnam or whether or not the company has a permanent establishment in Vietnam.

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In practice, however, determination of profits of a permanent establishment is usually difficult. Therefore, the Article 7 of the Treaties for avoidance of double taxation which have been entered into between Vietnam and other States often contains the provisions below which differ from the above principles :

a) Profits of a foreign company may be attributed to its permanent establishment in Vietnam using certain simple methods for determination such as revenue, quantity of works etc.

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Profits attributable    Revenue derived

to Company A's          from the permanent

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in Vietnam                                     Gross profit

=                       ------------------  X  Company A

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                         Company A

Profit attributable to the permanent establishment = 100/1000 * 3000 = 30

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7. Article 8, "Shipping and Air Transport" provides that profits derived from the operation of international transport (of cargo and passengers) by airlines or shipping companies will be taxable only in the State of which the airlines/companies are a resident or in which the airlines/companies have an actual place of management.

For example:

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8. Article 9, "Associated Enterprises" provides that Vietnam and the States contracting to a Treaty for avoidance of double taxation with Vietnam have the right to impose their respective provisions dealing with movement of costs between associated enterprises and enterprises which have economic relations which differ from those which would be made between independent enterprises.

For example :

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9. Contents of Article 10 "Dividends", Article 11 " Interest" and Article 12 "Royalties" provide that Vietnam and the other Contracting State have the right to charge income tax on dividends, interest and royalties in accordance with the principle that tax is to be charged at source.

Example 1: If Company A, a Vietnam joint stock company pays dividends to its shareholder (a Thai company or individual) who is a resident of Thailand, then Vietnam has the right to tax these dividends. Although the shareholder is not a resident in Vietnam, the dividends are however derived from Vietnam.

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Example 3: Company A, a resident of Thailand has engaged in a transfer of technology to Company B, a resident of Vietnam. Upon Company B's payment to Company A for the acquisition or use of the foresail technology, Vietnam has the right to impose tax in Vietnam on the such payment.

In addition to the above, contents of Article 10, Article 11 and Article 12 provide the tax rate limits which are to be applied in each State where the recipient is the beneficiary i.e. in respect of dividends, interest and royalties, a State has the right to tax these items if they are derived in that State but such taxation must not exceed the rate prescribed in the Treaty. In the Treaties between Vietnam with other States, this tax rate limit is usually 10%. This rate is usually stated in paragraph 2 of Article 10, 11 and 12 of the Treaties for avoidance of double taxation.

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* Gains from the alienation of ships or aircraft and movable property used in the operation of international traffic or from the alienation of movable property pertaining to the operation of such ships or aircraft.

* Gains from the alienation of debentures or shares (excluding the alienation of shares or debentures of a company whose property mainly comprises immovable property).

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- That individual has in the other State one or more fixed places of business (office or base which is available to him on regular or irregular basis) for the purpose of performing his activities; or - His stay in the other State is for a period or periods amounting to or exceeding the aggregate 183 days in any twelve consecutive months.

12. Contents of Article 15 "Dependent personal services" provide that salary, wages and other remuneration of salary or wage nature shall be taxable in both States if the individual falls into one of the three following cases :

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* His stay in the other State is for less than 183 days but his employer or the representative of his employer pays him salary and wage as if he is a resident of the other State;

* His stay in the other State is for less than 183 days but his salary and wage are paid by a permanent establishment or a fixed place of business in the other State which belongs to his employer.

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Example : An enterprise with 100% foreign owned capital or a joint venture in Vietnam in which a member of the board of directors is a foreigner. This foreigner who is not a resident of Vietnam (his stay in Vietnam is for less than 183 days or zero day in a year) but in accordance with the provisions of this Article, Vietnam has the right to tax the fees payable to him by the aforesaid enterprise with 100% foreign owned capital or joint venture.

14. Contents of the Article 17 "Artistes and athletes" provide as follows :

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* Income derived by an artiste or athlete of a State from his show in the other State where the show expenses including remuneration for him are funded by the government of his State shall be taxable only in his State.

15. Contents of Article 18 "Pensions" provide that any amount of pensions (other than the pension provided in Article 19) shall be taxable only in the State of which the pensioner is a resident.

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1. Pensions :

Pensions shall be taxable only in the other State if the individual is both a resident and a citizen of that other State.

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Remuneration shall be taxable only in the other State if the individual is both a resident and a citizen of that other State or if he does not hold citizenship of that other State but is carrying on other services (in addition to the main service rendered to the government of that State, for example working for a company or carrying on private business activities in that other State) for doing which he has become a resident of that other State.

3. Remuneration and pensions payable to an individual for services rendered in connection with a business carried on by the government of a State in another State shall not be subject to taxation only in one State in accordance with the above rules but subject to taxation in both States in according to the rules provided in Article 15, 16 and 18 of the Treaties.

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- Payments which the student or apprentice receives from a source outside that other State for purpose of his maintenance and education in that other state;

- Certain annual payments specified in the Treaties (which vary from Treaty to Treaty) derived by the student or apprentice from his service rendered in that other State provided that such services are directly connected to his education or training of such student or apprentice.

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18. Contents of Article 22 "Other Income" provide that other items of income which are not dealt with in the Treaty shall be taxable in the State of which the person is a resident.

19. Contents of Article 23 "Avoidance of double taxation" provide methods for avoidance of double taxation to be carried out in Vietnam and the other Contracting State. There are several methods for avoidance of double taxation in the Treaties between Vietnam and other State such as full deduction, deduction of common taxes, indirect deduction, full exemption, exemption from progressive taxes and deduction of deemed taxes. Application of these methods vary from State to State. In all Treaties for avoidance of double taxation which Vietnam has signed with other States, Vietnam applies the following two methods for avoidance of double taxation :

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The content of this method is that where a resident of Vietnam receives income from another State contracting to a Treaty with Vietnam under which such income is taxable in both States, Vietnam will allow a deduction of tax paid in that other State in respect of such income from the tax payable in Vietnam provided, however, that such deduction does not exceed the amount of tax payable in Vietnam.

Example 1 :

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- Computation of Company A's tax in Thailand is : 300 x 30% = 90

- Computation of Vietnam's tax chargeable in respect of income derived from overseas is : 300 x 45% = 135

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Example 2 :

Same as the above example except that the profits tax rate applicable to Company A in Vietnam is 25%. Avoidance of double taxation will be carried out as follows :

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Therefore, the amount of tax paid abroad (90) exceeds the amount of tax payable in Vietnam. Company A is therefore only allowed for a deduction from Vietnam's tax in an amount equal to the Vietnam's tax in respect of income derived overseas is 75.

- Computation of tax payable in Vietnam in respect of total income with deduction of tax already paid overseas is : (1000 x 25%) - 75 = 175

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The content of this method is that where income derived by a resident of Vietnam from another State contracting to a Treaty with Vietnam, if such income is taxable in both States under the Treaty but is exempt from tax under the law of that other State then Vietnam will allow a deduction of the tax deemed to be paid in that other State from the amount of tax payable in Vietnam despite the fact that such income is actually exempt from tax in that other state. However, the tax which is deemed to be paid overseas and is being claimed for deduction must not exceed the tax liability in Vietnam.

Example 1 :

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- Computation of tax deemed to be paid in Thailand is : 300 x 30% = 90

- Computation of Vietnam's tax liability in respect of income derived from overseas is : 300 x 35% = 135

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Example 2 :

Similar to example 2 of point 1 above, where Company A is exempt from Thailand's tax, deduction of the Company's deemed tax in Vietnam may be allowed only 75 rather than as 95, the amount of tax deemed to have been paid in Thailand.

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1. Article 24 " Non-discrimination" provides that all nationals, permanent establishments or subsidiary companies of an enterprise of a State contracting to a Treaty with Vietnam shall not be subjected to any income taxation or any other determination of taxable income, tax rates, exemption and deduction which are more burdensome than the same circumstances to which Vietnamese nationals or enterprises are or may be subjected.

2. Article 25 "Mutual agreement procedure" provides that when a resident of Vietnam of the States contracting to a Treaties with Vietnam feels that the tax imposed on him is not in accordance with the provisions of the Treaty he may appeal directly to the Ministry of Trade or the General Department Taxes in the State of which he is a resident rather than presenting the appeal to the authorities specified in the tax laws of the States.

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A French individual who worked in Vietnam for a period less than 183 days in a year. In this case he is a resident of France. if he feels that he is not being taxed in Vietnam in respect of his income in accordance with the Treaty, he may appeal to the Ministry of Finance of France.

Example 2 :

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To resolve such as appeal the Ministry of Finance or the General Department of Taxes of both States shall consult with each other for the purpose of reaching a mutual agreement and final decision.

3. Article 26 "Exchange of Information" provides that with a view to proper implementation of the provisions of the Treaty in both States and especially for avoidance of double taxation in a State or in both States, the two Ministries of Finance or General Department of Taxes shall carry out the exchange of information on a regular basis or upon a request arising from a particular case or both for the purposes of exchanging the following information :

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- Relevant information relating to determination of taxable income of a resident of a State in the other State (for purposes of preventing tax evasion, avoiding unfair taxation or serving as reference in court disputes etc.).

21. Contents of the Articles numbered from 27 to 30 are provisions setting the dates of entry into force and termination of the Treaty. The general provisions are :

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- The Treaty will remain in force indefinitely but after the expiration of a period of five years following the date of its entry into force either contracting State may terminate the Treaty by serving a written notice of termination to the other State through a diplomatic channel.

B- GUIDANCE FOR IMPLEMENTATION OF TREATIES

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1. Profits tax :

a. Vietnamese enterprises and companies, joint venture with foreign parties, enterprises with 100% foreign owned capital, branches of foreign banks, joint venture banks, main contractors to oil and gas contracts and foreign enterprises operating in the export processing zones of Vietnam shall be subject to profits tax accordance with the existing provisions and be allowed to deduct amounts of overseas tax paid in respect of overseas income in accordance with the methods for avoidance of double taxation provided in this memorandum.

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* If it is determined that such foreign organization or individual is carrying on business in Vietnam through a permanent establishment (in respect of a company) or a fixed place of business (in respect of individual) then taxation shall be applied in accordance with the existing provision of the aforesaid Circular.

* If it is determined that such foreign organization or individual is not carrying on a business in Vietnam through a permanent establishment or a fixed place of business then :

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 Entities which carry on business in any form other than a form of foreign investment in Vietnam (in accordance with guidance of Circular 30 TC/TCT dated 18 July 1992 and Circular 07 TC/TCT dated 30 March 1992) shall be subject to withholding tax at the place where the turnover tax is incurred, at a proportion of 50% of the tax collected in accordance with provisions of the above mentioned Circulars.

2. Income tax for high income tax earners :

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b. Where a resident of Vietnam (Vietnamese citizens, other individuals setting in Vietnam and foreigners working in Vietnam etc.) is in receipt of overseas income which has been subjected to overseas tax, he will be allowed to deduct the overseas tax from his Vietnam income tax in accordance with the methods for avoidance of double taxation provided in this memorandum.

3. Profits remittance tax and royalties tax :

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The guidelines in set out at [B] point 1 and 2 of Part I shall apply to only foreign organizations which and individuals who are residents of a State which has signed a Treaty with Vietnam and the Treaty has entered into force in Vietnam.

II. ORGANIZATIONS RESPONSIBLE FOR IMPLEMENTING THE TAX TREATIES :

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1. The General Department of Taxes :

In addition to the duty to participate in discussion and assist in the signing of Treaties for avoidance of double taxation with other States, the Department of International Cooperation of the General Department of Taxes shall take the lead in assisting the General Department of Taxes in carrying out the following tasks :

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* Provide guidance to an supervision on the Department of Taxes in regard to the implementation of the Treaties.

* Conduct research and take part to discuss with foreign tax authority on disruptions, appeal appearing during on implementation agreements which must be solved by negotiate between Vietnam tax authority and foreign tax authority.

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* Provide explanation of the Treaties to Department of Taxes and taxpayers in respect of specific issues.

2. Provincial and city Department of Taxes

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* Conduct research on Treaties for avoidance of double taxation which Vietnam has signed with other States and research on documents concerning with guidance for implementation of these Treaties to provide regular assistance to Departments of Taxes as well as tax offices for purpose of comprehension of each Treaty's details and proper implementation.

* Act as a contact of the relevant Department of Taxes to provide explanation on the Treaties to all tax entities in the concerned province and city.

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* Assume the responsibility for gathering information for purpose of exchange of information with foreign tax foreign tax authorities upon request of the General Department of Taxes.

The above information presents general guidance on Treaties for avoidance of double taxation and their application. All Departments of Taxes are requested to carry out immediate implementation. Any difficulties experienced in the course of implementation should be reported to the General Department of Taxes for immediate guidance. Issues which have not been addressed in this memorandum shall be dealt by the General Department of Taxes in a separate document.

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FOR THE GENERAL DEPARTMENT OF TAXES
DEPUTY GENERAL DIRECTOR




Nguyen Duy Duc

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