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P2. A Comprehensive Manual for the Foreign Contractor Tax in Vietnam for 2023

posted 6 months ago

To what transactions is Vietnam’s foreign contractor tax not applicable?

Vietnam’s FCT does not apply to all foreign contractors, as there are some non-FCT cases specified in the laws. One such example is pure purchase contracts, where a Vietnamese customer signs an agreement with a foreign entity to purchase goods or commodities from a foreign country and then imports them into Vietnam.

In addition, the following cases are also not subject to FCT as prescribed in Article 2 of Circular 103/2014/TT-BTC. 

What are the ways to declare foreign contractor tax in Vietnam?

There are three methods available: the direct method, the declaration method (also known as the Vietnam Accounting System (VAS) method), and the hybrid method.

Direct method

The most common and practical method of declaring foreign contractor tax (FCT) is the direct method, also known as the withholding method. With this method, the Vietnamese party is responsible for declaring and paying the FCT to the local tax department. The Vietnamese party must first register the contracts with the tax authority and withhold the applicable FCT before making payment to the foreign contractor.

Meanwhile, the declaration method works differently. The taxable revenue in this method depends on the nature of the overseas payment, whether the payment includes tax (net) or not (gross).

Calculated according to NET price

When a foreign business or contractor enters into a contract with a company in Vietnam, they call the total value of that contract before tax, the net contractor tax. To calculate corporate tax at the actual price, we will first calculate CIT, then VAT.

– Corporate income tax:

Revenue subject to CIT = Revenue excluding CIT : (1 – Ratio of CIT calculated on taxable turnover)

CIT = Taxable turnover x CIT rate on taxable revenue

– VAT tax:

Revenue subject to VAT = Revenue exclusive of VAT : (1 – Percentage for calculating VAT on turnover)

VAT payable = Revenue for calculating VAT : Percentage for calculating VAT on sales

Tax payable by contractors = VAT + CIT

Calculated according to GROSS price

When a foreign business or contractor enters into a contract with a company in Vietnam, they call the total value of that contract, including tax, gross contractor tax. To calculate contractor tax at Gross price, we first calculate Value Added Tax, then calculate CIT.

Contractor tax payable = VAT payable + CIT payable

VAT = Contract value x Percentage for calculating VAT on sales

CIT = (Contract value – VAT) x CIT rate

Important notes when calculating contractor tax

– Before deducting taxes they owe, the contractor expect to receive a taxable income amount. Income includes expenses that Vietnamese companies have to pay on behalf of foreign companies, such as accommodation costs for entrepreneurs.

– Using the net calculation method, corporate clients in Vietnam pay foreign companies (excluding Vietnamese amounts). The tax authorities then convert this sum to Vietnamese currency to assess taxable income tax.

– If a foreign contractor hires a sub-organization, the tax authorities deduct sub-organization’s income from the international enterprise’s total. This is for work assigned to the sub-organization. However, contractors/providing services or goods won’t have their taxable income excluded if fulfilling contract terms.

– When calculating VAT and CIT, each different percentage will correspond to each business activity of that company.

– When calculating tax, a foreign organization with many business activities must separate each type. Each corresponds to a particular activity. The case of applying the highest tax rate will be for non-separated businesses.

– International companies are subject to separate tax for each supply activity, even if they provide equipment, training, guidance, and test services. If not separated, the business will be taxed 2% of the total income.

– If the manufacturer is responsible for guaranteeing the import of goods to foreign contractors, they will not be liable for contractor tax related to the use of unsecured services.

Conclusion

In conclusion, navigating the Foreign Contractor Tax in Vietnam can be a daunting task, but with the right information and guidance, it is possible to comply with the regulations and avoid any legal issues. This comprehensive manual serves as a useful guide for individuals and businesses, outlining the various methods for declaring FCT, providing key information on rates and exemptions, and highlighting common mistakes to avoid. By following this guide, taxpayers can ensure that they meet their obligations under the law while optimizing their tax position and minimizing the risk of penalties and fines.

Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn  Email: [email protected]

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