F6 acca lesson 3 module fct (foreign contractor tax)

OVERVIEW AND LEGISLATION Foreign Contractor Tax FCT in Vietnam is not a distinct tax type but refers to the Corporate Income Tax CIT and Value Added Tax VAT obligations applicable to fo

F6 ACCA TAXATION LESSON 3 – FOREIGN CONTRACTOR TAX

PART 1 - OVERVIEW ON FCT

I OVERVIEW AND LEGISLATION

Foreign Contractor Tax (FCT) in Vietnam is not a distinct tax type but refers to the Corporate Income Tax (CIT) and Value Added Tax (VAT) obligations applicable to foreign organizations and individuals conducting business or earning income in Vietnam (i.e., foreign contractors) In addition to CIT and VAT, foreign contractors may also be subject

to other tax obligations, such as import duties, Special Consumption Tax (SCT), and others, which fall outside the scope of the FCT regime

The current legislation governing FCT is primarily Circular 103/2014/TT-BTC issued by the Ministry of Finance on August 6, 2014, which replaced Circular 134/2008/TT-BTC and Circular 197/2009/TT-BTC Circular 103/2014/TT-BTC, effective from October 1, 2014, provides detailed guidance on the tax obligations of foreign contractors and is the primary regulation for FCT in Vietnam as of today This circular should be read in conjunction with other relevant CIT and VAT regulations, such as Decree 218/2013/ND-CP (on CIT) and Decree 209/2013/ND-CP (on VAT, as amended), to fully understand the tax treatment of foreign contractors For instance, VAT rates applicable to goods or services supplied by foreign contractors are determined under the prevailing VAT laws, such as Law on Value Added Tax No 13/2008/QH12 and its amendments

II SCOPE OF GOVERNING

1 Who is subject to FCT?

• Foreign contractors, who are foreign business organizations doing business with or without a Permanent Establishment (“PE”) in Vietnam and foreign business individuals being residents or non-residents, doing business in Vietnam or having income derived from Vietnam based on contracts, agreements or undertaking with Vietnamese organizations or individuals;

• Foreign sub-contractors, who are foreign business organizations doing business with or without a PE in Vietnam and foreign business individuals being residents or nonresidents, doing business in Vietnam or having income derived from Vietnam based on contracts, agreements or undertaking with the foreign contractors in order to perform a portion of the foreign contractor’s contract

2 FCT tax payer

Persons liable to pay taxes under FCT regulations (i.e taxpayers) may or may not be the foreign contractors or foreign sub-contractors, depending on certain circumstances as follows:

• Foreign contractors and sub-contractors who (i) have a PE or being a resident in Vietnam and (ii) adopt the Vietnamese accounting system and (iii) have a contractual term of at least

183 days shall pay taxes themselves;

• For foreign contractors and sub-contractors who do not meet any of the above conditions, taxpayers shall be their Vietnamese contractual parties, who are liable to withhold the taxes before making payments to foreign contractors or sub-contractors Vietnamese contractual parties may include the following:

Business organizations established pursuant to Vietnamese laws (e.g Law on Enterprise, Investment Law, etc.);

Petroleum contractors operating in accordance with the Law on Petroleum;

Branches of foreign companies permitted to operate in Vietnam;

Foreign organizations or representatives of foreign organizations permitted to operate in Vietnam;

Ticketing offices, Vietnamese agents of foreign airlines permitted to fly from or to Vietnam, either directly or jointly with Vietnamese airlines;

Organizations or individuals providing sea freight services for foreign shipping lines, Vietnamese agents of foreign forwarders, express couriers;

Securities companies, securities issuers, fund management companies, commercial banks where foreign investment funds or organizations open their securities trading accounts; Other organizations or business/production individuals in Vietnam

3 Interaction between FCT and PIT regime

FCT regulations only cover CIT and VAT obligations of foreign contractors and foreign sub-contractors, specifically:

• Foreign contractors and sub-contractors being business organizations: CIT and VAT as per guidance under Circular 134;

• Foreign contractors and sub-contractors being business individuals: VAT under Circular

134 and PIT under PIT regulations If foreign individuals have income on an employment basis, they are only subject to PIT

III FCT EXEMPTION

FCT regulations do not cover the following subjects:

• Foreign organizations or individuals doing business in Vietnam under the Law on Investment, the Law on Petroleum or the Law on Credit Institutions (i.e their subsidiaries shall be subject to taxes as a normal company)

• Foreign organizations or individuals supplying goods to Vietnamese organizations or individuals without accompanying services whereby:

The goods are delivered at foreign border gate: the seller will bear all responsibilities, costs and risks relating to the export and delivery of goods at the foreign border gate; the purchaser will bear all responsibilities, costs and risks relating to the receipt and transportation of goods from the foreign border gate to Vietnam

The goods are delivered at Vietnamese border gate: the seller will bear all responsibilities, costs and risks relating to goods up to the place of delivery of goods at the Vietnamese border gate; the purchaser will bear all responsibilities, costs and risks relating to the receipt and transportation of goods from the Vietnamese border gate

If follows that if the goods are accompanied with services (e.g supply of machinery with installation, training, etc.) or when the goods are delivered within the territory of Vietnam, FCT shall apply

• Foreign organizations or individuals have income from services which are provided and consumed outside of Vietnam

It is relatively straightforward to identify the place of service provision, however determination of the service consumption place may be problematic in practice

Examples of services provided and consumed outside of Vietnam, thus not subject to FCT, include goods handling at overseas ports by an overseas company, consultancy services by foreign law firms for overseas investment project of a Vietnamese company, etc

• The following services performed outside of Vietnam for Vietnamese individuals or organizations (i.e regardless of whether the place of consumption is):

o Advertising, marketing

o Investment and commercial promotion (There is no definition of these activities in the FCT Circular, therefore, the Commercial Law may be used as a guide, in which commercial promotional activities include sale promotion, advertising, introduction and display of goods, trade fairs and exhibitions);

o Brokerage for sale of goods;

o Training;

o Fee sharing for international postal or telecommunication services between Vietnamese parties and foreign parties when the services are performed outside of Vietnam (for example, overseas telecom companies must share a portion of the telephone fees they get from overseas customers upon calling Vietnamese numbers);

o Fees for leasing satellite and bandwidth of foreign suppliers

PART 2 - BASIS AND METHOD OF FCT CALCULATION

A OVERVIEW ON FCT TAXABLE INCOME

1 Items subject to VAT

1.1 Services, or services attached to goods subject to VAT provided by foreign contractors

or sub-contractors on a contractual basis for the purpose of production, trading or consumption in Vietnam, including:

• Services, or services attached to goods subject to VAT provided in Vietnam by foreign contractors or sub-contractors, which are consumed in Vietnam;

• Services, or services attached to goods subject to VAT provided from outside of Vietnam

by foreign contractors or sub-contractors, which are consumed in Vietnam

1.2 In case goods are provided where the delivery takes place within the territory of Vietnam (other than the border gate), or when the supply of goods are accompanied with services performed in Vietnam such as installation, test run, warranty, maintenance, replacement, etc (regardless of whether the provision of these services are included in the value of the supply contracts), then the value of the goods is only subject to VAT upon importation and the value of services is subject to VAT under the FCT regulations

The above is a positive development because under previous FCT regulations the foreign contractors would be subject to double VAT, upon importation and upon payment to foreign contractors

In order to enjoy this relief, the value of the goods and services must be separated in the contract, otherwise VAT shall apply on the total value of the contract

Example:

Company in Vietnam signs a contract with Company B overseas to purchase a machinery and equipment production line for a Cement Plant project The total contract value is USD

100 million, comprising the value of the machinery and equipment at USD 80 million (the

equipment component is VAT-taxable at the rate of 10%), and the value of services being guiding installation and supervising installation, warranty and maintenance at USD 20 million

When Company A imports the production line, it must pay VAT at the import stage on the value of VAT-taxable imported equipment

Company B must perform VAT tax obligations on the value of the contract signed with Company A as follows:

• VAT shall be calculated on the value of the services (USD 20 million), but not on the value

of the imported production line

• If the contract did not separate out the value of the production line from the value of the services, then VAT shall be calculated on the total contract value of USD 100 million

2 CIT Taxable income

2.1 Income of foreign contractors derived from providing services, services attached to goods in Vietnam on a contractual basis

2.2 Total value of goods and service shall be subject to CIT in case goods are provided where the delivery takes place within the territory of Vietnam, or when the supply of goods are accompanied with services performed in Vietnam such as installation, test run, warranty, maintenance, replacement, etc (regardless of whether the provision of these services are included in the value of the supply contracts)

Example:

Company A in Vietnam signs a contract with Company B overseas to purchase a machinery and equipment production line for a Cement Plant project The total contract value is USD

100 million (excluding VAT), comprising the value of the machinery and equipment at USD

80 million, and the value of services being guiding installation and supervising installation, warranty and maintenance at USD 20 million

Company B must perform CIT tax obligations on the value of the contract as follows:

• CIT shall be calculated separately on the value of the imported production line (USD 80 million), and on the value of the services (USD 20 million) multiplied by the appropriate CIT rate

• If the contract did not separate out the value of the production line from the value of the services, then CIT shall be calculated on the total contract value (USD 100 million) multiplied by the appropriate CIT rate

2.3 Income derived under any forms on a contractual basis, regardless of the place of conducting business of foreign contractors or sub-contracts, for the following items:

• Income from the transfer of ownership or the right to use assets;

• Royalty income, which are the payments for the right to use or the ownership of intellectual properties and technology transfer It should be noted that leasing of machinery and equipment is no longer classified under this category for FCT purposes

• Income from sale or disposal of assets;

• Interest income, including charges, interest for deferred payment of sale or service contracts (This category does not include deposit interest of foreign individuals and deposit interest from the bank accounts used for operation in Vietnam for diplomatic representative offices, international organizations and non-governmental organizations);

• Income from securities investment;

• Penalties, compensation received from contractual breaches;

• Other income

B METHOD FOR FCT CALCULATION

Under the prevailing FCT Regime, there are three methods for FCT compliance

• VAS method: a method where the foreign contractor shall declare and pay tax similar to

a Vietnamese legal entity (i.e VAT on deduction basis and CIT on actual profit basis);

• Deemed method: a method where the Vietnamese contracting party shall declare and pay tax on behalf of foreign contractor on the deemed rate basis This method is also referred

to as “withholding method”

• Hybrid method: a method where the foreign contractor shall declare VAT on deduction basis and CIT on deemed basis

I VAS METHOD

1 Conditions for applying VAS method

Foreign contractors and foreign sub-contractors may apply to pay tax under this method if they satisfy all of the following conditions:

• Having a PE in Vietnam (determined under the laws on CIT, applicable for foreign organizations) or are residents (determined under the laws on PIT, applicable for

individuals) If the foreign contractors wish to apply the tax treaty, the PE provision under the relevant treaty shall supersede the one in CIT laws; and

• The period of conducting business in Vietnam under the contracts must be at least 183 days from the effective date of the contracts; and

• They apply the Vietnamese Accounting System

Note that if the foreign contractors, sub-contracts are carrying out more than one contracts and paying FCT under this method for one contract, they are obliged to apply the same method to other contracts (regardless of whether the other contracts meet the above conditions) If, after the expiry of the contract for which FCT is paid on this method, the contractors may continue paying tax under this method for the next contract if they still meet the above conditions

2 FCT calculation

VAT calculation

VAT shall be calculated using the deduction method as provided under VAT laws (i.e output VAT less deductible input VAT)

CIT calculation

CIT shall be calculated based on the assessable income of the contracts, determined under the CIT laws (i.e 25% on assessable income)

II DEEMED METHOD

1 Scope of application

“Non-VAS method” is an unofficial name commonly used for contractors paying VAT under direct method and CIT under deemed method as a percentage on the turnover Any foreign contractor or sub-contract who does not meet any of the conditions as above shall pay tax under this method and the Vietnamese parties shall be responsible for withholding and pay the taxes on behalf of the contractors

2 VAT calculation

VAT payable = Added value * Applicable VAT rate

2.1 The added value of goods or services subject to VAT is taxable turnover multiplied

by the rate of added value as a % of the turnover (refer to below table)

Added value = Taxable turnover * Deemed added value

VAT-taxable turnover is the total turnover from supply of taxable services or services attached to goods received by foreign contractors/foreign sub-contractors, without any deduction of payable taxes, including expenses (if any) paid by the Vietnamese party on behalf of the foreign contractor or foreign sub-contractor

2.2 Where the turnover received by the foreign contractor or foreign sub-contractor does not include VAT payable (VAT-exclusive contractual value), the net turnover will be converted into turnover including VAT for VAT purposes

VAT taxable turn over = Net price excluding VAT / (1 -Deemed VA rate * VAT rate)

Example:

Foreign Contractor A provides a Vietnamese party with services of supervising the construction volume of Cement Plant Z with a contract price excluding tax of USD 300,000 In addition, the Vietnamese party arranges accommodation and a working place for managers of the foreign contractor valued at USD 40,000 Under the contract, the Vietnamese party is responsible to pay VAT on behalf of the foreign contractor

Calculation of taxable turnover:

VAT-taxable turnover = (300,000 + 40,00)/(1 - 50%x 10%o) = USD 357,894.73

2.3 VAT taxable turnover does not include value of the works and machinery, equipment subcontracted to the Vietnamese subcontractors, or foreign sub-contractors adopting VAS However, this deduction does not apply to value of goods and services purchased from the suppliers in Vietnam to perform the contract Therefore distinction should be made between

“subcontractor” and “supplier” for deduction purposes based on the nature of the works

Example:

Foreign Contractor A signs a contract with a Vietnamese party for the construction of Cement Plant Z with a total contract value (including VAT) of USD 10 million, and such contract specifically stipulates that the foreign contractor will assign part of the value of construction and installation to Vietnamese Sub-contractor B for a price of USD 1 million The VAT-taxable turnover offoreign contractor A shall be determined as follows:

VAT-taxable turnover = USD 10 million - USD 1 million = USD 9 million

It should be noted that this deduction does not apply to foreign sub-contractors who do not pay taxes under VAS method In this case the taxable turnover for the foreign contractors

shall be the total contract value, however the foreign sub-contractors shall not be required

to pay further taxes on the money received from the foreign contractors

2.4 For international forwarding or logistics services, the taxable turnover does not include the international transportation freights paid to the carriers (because international transportation is subject to VAT at 0% under VAT laws)

2.5 For courier services from Vietnam to overseas countries, the taxable turnover shall be the total turnover received by the foreign contractors, without any deduction

2.6 VAT rate for the VAT-taxable goods or services are the associated tax rates stipulated

in the Law on Value Added Tax and subsequent detailed guidance The standard VAT rate

is 10%

Value added rate as

% of taxable turnover

1 Services, leasing of machinery, equipment, insurance 50%

2

Construction and installation with supply of materials

and/or machinery and equipment attached to construction

works

30%

3

Construction and installation without supply of materials

and/or

machinery and equipment attached to construction works

50%

4 Transportation, production, other business activities 30%

2.7 Foreign contractors and foreign sub-contractors which pay VAT under this method are not allowed to claim input VAT on goods and services purchased for performance of the signed contracts with Vietnamese parties, including VAT of the sub-contracts awarded to Vietnamese sub-contractors) It follows that the value of the sub-contract to be deducted from taxable turnover discussed in 4.2.3 would not include the VAT charged by the subcontractors

2.8 For contracts with different business activities, the rates of added value will be applied

on the basis of the VAT-taxable turnover of each business activity conducted by a foreign contractor or foreign sub-contractor under the contract Where the value of each business