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THE
FINANCE MINISTRY
THE GENERAL DEPARTMENT OF TAXATION
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SOCIALIST
REPUBLIC OF VIET NAM
Independence - Freedom – Happiness
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No.
1108/TCT-ĐTNN
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Hanoi,
March 29, 2006
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OFFICIAL LETTER
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To:
Provincial/municipal Tax Departments
In the course of implementation
of the Finance Ministry’s Circular No. 05/2005/TT-BTC of January 11, 2005,
guiding the tax regime applicable to foreign organizations without Vietnamese
legal person status and foreign individuals doing business or earning incomes
in Vietnam, several problems have arisen. For uniform application, after
reporting to the Finance Ministry, the General Department of Taxation hereby
specifically guides a number of points of Circular No. 05/2005/TT-BTC as
follows:
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1.1. Under Point 2, Section 1,
Part A of Circular No. 05/2005/TT-BTC, foreign organizations and individuals
that do business in Vietnam but are not present therein, and earn incomes in
Vietnam shall have to pay taxes in Vietnam. Services provided by foreign
organizations or individuals that are not present in Vietnam shall be taxed in
Vietnam when such services are used in Vietnam and paid from sources inside
Vietnam.
Thus, foreign organizations or
individuals that earn incomes from services provided and used outside Vietnam
shall not have to pay tax thereon in Vietnam.
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In this case, the cargo-handling
service at Hong Kong port is a service provided and used in Hong Kong. So
company H shall not have to pay tax in Vietnam under the guidance in Circular
No. 05/2005/TT-BTC.
1.2. Foreign individuals who are
not present in Vietnam but earn incomes in Vietnam, such as royalties, incomes
from technology transfer and services provided and used in Vietnam, shall have
to pay tax thereon under the provisions of Circular No. 05/2005/TT-BTC.
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2. Regarding bases and methods
of tax determination
Taxable turnover and payable tax
amounts in several cases shall be determined as follows:
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Example: Contractor F (French),
who does not apply the Vietnamese accounting regime, supplied machinery and
equipment to enterprise A at the project’s site. The total contractual value
was USD 1,000,000, of which the value of machinery and equipment which cannot
be yet manufactured in Vietnam for forming enterprise A’s fixed assets was USD
600,000.
Contractor F’s tax obligation
shall be determined as follows:
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- Business income tax (BIT): USD
1,000,000 x 1 % = USD 10,000
2.2. For contracts of supply of
machinery and equipment accompanied with installation instruction, training and
trial operation services, if the value of machinery and equipment and that of
services can be separated, then taxes shall be calculated at separate tax rates
applicable to the value of each contract component. If the value of machinery
and equipment and that of services cannot be separated, then the relevant VAT
rate shall apply to 25% the taxable turnover and the BIT rate of 2% (for other
production and business activities) shall apply to the whole contractual value.
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Contractor H’s tax obligation
shall be determined as follows:
- VAT: USD 10,000,000 x 10 % x
25 % = USD 250,000
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2.3. Where a foreign contractor
who does not apply the Vietnamese accounting regime subcontracts part of the
work stated in the contract signed with the Vietnamese party to a Vietnamese
subcontractor, the foreign contractor’s VAT- and BIT-liable turnover shall not
cover the value of the work performed by the Vietnamese subcontractor.
If such a subcontractor is a
foreign organization or individual, the taxable turnover shall be the whole
turnover received by the foreign contractor under the contract signed with the
Vietnamese party. The foreign principal contractor shall not have to pay tax on
the value of the work subcontracted to the foreign subcontractor if he/she can
present documents proving that the foreign subcontractor has registered to
directly pay taxes to the tax authority on the value of the subcontract
performed by the foreign subcontractor.
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This provision shall apply to
Vietnamese enterprises signing contracts for foreign loans before 1999. After
1999, if the interest rate and payment conditions of these contracts were
changed to become more favorable than they were before 1999, with the same
lenders, loan duration and other contractual terms, then interests arising from
these contracts shall not be liable to BIT.
Example: In 1998, company V in
Vietnam signed with company S of Singapore a loan contract with a term of 10
years at an interest rate of Sibor + 0.5%. In 2005, the two companies agreed to
reduce the interest rate to Sibor + 0,25 % while keeping the loan duration and
other contractual terms unchanged. So, interests arising from the contract from
the time of adjustment of the interest rate to the end of the contractual term
( 2008) shall not be liable to BIT.
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3. Regarding registration
declaration for tax payment.
3.1. Under the provision of
Point 3, Section I, Part B of Circular No. 05/2005/TT-BTC, for foreign
contractors or subcontractors that have permanent establishments in Vietnam,
keep invoices and documents and fully reflect on accounting books turnover from
goods and services sold; the value of goods and services bought, output VAT;
creditable input VAT and payable VAT, as from February 16, 2005 (the effective
date of Circular No. 05/2005/TT-BTC), they shall register with the Tax
Authorities to pay VAT by credit method and to pay BIT at a turnover-based rate
as guided at Point 2, Section II, Part B of Circular No. 05/2005/TT-BTC. In
case contractors or subcontractors have registered and paid taxes in accordance
with this provision, if they sign other contracts, then they shall continue
registering and paying VAT and BIT by this method.
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Foreign contractors and
subcontractors shall have to separately account VAT and BIT of each contract.
Example: in 2000, foreign
contractor H signed the first contract with a seven-year term with enterprise X
and registered to pay VAT by the method of direct calculation based on added
value and pay BIT at a turnover-based rate. In 2006, contractor H signed the
second contract with enterprise Y and registered to pay VAT by the credit
method and pay BIT at a turnover-based rate.
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3.2. For foreign principal
contractors paying VAT by the credit method and paying BIT by the
turnover-based method:
Foreign principal contractors
shall have to register, declare and pay taxes directly at the tax offices of
the localities where the contractors are headquartered. They shall declare and
pay VAT under the guidance in Part C of the Finance Ministry’s Circular No.
120/2003/TT-BTC of December 12, 2003, and pay BIT under the guidance at Point
2, Section II, Part C of the Finance Ministry’s Circular No.05/2005/TT-BTC of
January 11, 2005. The finalization of VAT and BIT by foreign principal
contractors shall be effected according to the calendar year.
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4. Regarding extension of
contracts:
For contracts which terminated
before February 16, 2005 (the effective date of Circular No.05/2005/TT-BTC) and
were extended as agreed upon between the contractual parties before that date,
tax declaration and payment shall comply with the guidance in Circular No. 169/1998/TT-BTC
of December 22, 1998, and Circular No. 95/1999/TT-BTC of August 6, 1999.
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5. Regarding remuneration:
5.1. Under the provision of
Point 2, Section IV, Part E of Circular No. 05/2005/TT-BTC, "For BIT
amounts of foreign contractors or subcontractors withheld and paid into the
state treasuries by the Vietnamese parties, the Vietnamese parties shall enjoy
a remuneration equal to 0.8% of the withheld BIT amounts, which shall, however,
not exceed VND 50 million per tax withholding and payment.”
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5.2 When making tax declaration
or finalization, the Vietnamese parties shall declare the remuneration amount
they are entitled to withhold on tax payment declaration or tax finalization
declaration form No. 02-NTNN and No. 04-NTNN enclosed herewith.
Provincial/municipal Tax
Departments are hereby requested to base themselves on Circular
No.05/2005/TT-BTC and this Official Letter to organize the guidance and
inspection of the tax declaration and payment by contractors to ensure proper
tax management of foreign contractors. Any problems arising in the course of
implementation should be reported to the General Department of Taxation for
timely guidance./.
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FOR
THE GENERAL DIRECTOR OF TAXATION
DEPUTY GENERAL DIRECTOR
Pham Van Huyen
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