I. Source Country Considerations for a Domestic Service Recipient/ Payor
A. Do the laws of your country impose any legal (non-tax) restrictions on ability of a domestic entity to make payments to a foreign entity for provision of services or on the amounts of such payments?
Vietnamese Dong is not free convertible currency, therefore, the payment by a domestic to a foreign entity is governed by rules on foreign exchange control.
Domestic entities who has foreign currencies from export of goods and services or from other current revenue sources overseas must retain foreign currencies bank accounts at credit institutions permitted to operate in Vietnam [1]. Payment made in foreign currencies aboard to a foreign company for provision of services must be transferred via licensed credit institutions. [2]
The Ordinance on Foreign Exchange also stipulates that all the payment in the territory of Vietnam must be made in Vietnam Dong [3] except for payments to certain entities allowed to receive payments from local entities in foreign currencies for international services such as insurance, aviation, hotels, tourism or services provided in isolation zones in international entry/exit ports. However, foreign companies providing services other than above mentioned services in Vietnam are still allowed to receive payment in foreign currencies within the territory of Vietnam if they provide services with the capacity of “foreign contractor” [4]. Accordingly, foreign companies provide services other than services mentioned above under contracts signed by its subsidiary in Vietnam will not be allowed to receive payment in foreign currencies from domestic entities.
Please note that, even though domestic entities are allowed to pay for services in foreign currencies in some circumstances, they have to self-balance their foreign currency needs. In case where the domestic entities do not have sufficient foreign currencies for the payment, they have to buy from the bank. The sale of foreign currencies will be based on the availability of foreign currencies and not all domestic entities are guaranteed for the assistance of the government in balancing their foreign currency needs. As the matter of practice, the payment may be delayed for the reason of having not sufficient foreign currencies. The service contract should be drafted carefully regarding payment clause so that the foreign company does not loose its right to initiate a litigation in case where the domestic entities fail to pay due amount [5].
B. Are there limits on the tax deductibility of payments made to a related party for the provision of services?
Domestic entities “purchasing” services are required to withhold the contractor tax before making payment to foreign service providers. In case where the foreign company sub-contract a part of the contract signed with the domestic service “purchasers”, the withhold obligation of the “purchaser” varies depend on whether the sub-contractor is a domestic entity or a foreign entity [6].
– Sub-contractor is a domestic entity:
The foreign contractor must inform the “purchaser” of the value of the sub-contract. The “purchaser” will not withhold contractor tax on the value of sub-contract. The foreign contractor pay the full value of sub-contract to the domestic sub-contractor without any withholding. The domestic sub-contractor is responsible for its tax obligations as its other business.
– Sub-contractor is a foreign entity:
The “purchaser” withhold contractor tax on the total value of the contract, including the value of the sub-contract. The foreign contractor pay the foreign sub-contractor the net value, without tax, of the sub-contract and provide the sub-contractor with the proof proving that the contractor tax for the whole contract has been paid.
D. What rates of withholding tax apply to:
1. Payments for services provided offshore
VAT: from 0% to 10% of the turnover used for tax calculation
EIT: 5% of the turnover used for tax calculation; 2% for transportation and construction services
2. Payments for know how/intellectual property provided by an offshore entity
VAT: exempted
EIT: 10% of the turnover used for tax calculation
3. Payments of a local entity’s share of its international group’s cost of providing regional services
The payment of a local entity’s share of its international group’s cost of providing regional services can be paid only under the sub-contract signed between the foreign company and its local entity. The value of the local entity’s share will be excluded from the value of the contract for the purpose of tax withholding by the “purchaser”. The local entity is responsible for its tax obligations as its other business.
II. Source Country Considerations for a Foreign Service Provider/Payee
A. If a foreign entity provides services in your jurisdiction, at what point does that entity become subject to income tax in your jurisdiction?
1. Foreign service provider without tax treaty benefits
Foreign service providers are subject to Vietnamese EIT regardless whether the service is considered to be provided through permanent establishments.
2. Foreign service provider with tax treaty benefits
Foreign service provider are subject to Vietnamese EIT when it provides services in Vietnam through permanent establishments or has income derived in Vietnam. Foreign service provider having permanent establishments in Vietnam pay tax on income derived in Vietnam and taxable income derived outside Vietnam and related to the operation of such permanent establishments. . Foreign service provider having permanent establishments in Vietnam pay tax on income derived in Vietnam , which is not related to the operation of such permanent establishments. Meanwhile, foreign service provider not having permanent establishments in Vietnam only pay tax on income derived in Vietnam.
“Permanent Establishments” are defined in the EIT Law as including (Article 2.3):
– branches, management offices, plants, factory/workshops, warehouse, means of transport, mines, oil or gas well, place of exploration or exploitation of natural resources or equipment for exploration or exploitation of natural resources;
– a construction site, construction and installation works, activities of supervision of construction and installation;
– establishments for supply of services, including consultancy services through hired personnel or through other subjects;
– an agency for foreign company;
– a representative office in Vietnam under the following circumstances:
+ having the authority to sign contracts in the name of the foreign company;
+ not having the authority to sign contracts in the name of the foreign company but regularly performing the delivery of goods or provision of services in Vietnam.
The definition of “permanent establishment” may vary in each specific tax treaty.
B. What is the threshold at which a foreign company providing services in your jurisdiction must establish a local presence (for legal and tax purposes) in your jurisdiction?
The local presence of a foreign company may be in one of the following form:
– Representative office: representative office is not allowed to conduct profit-generated operations;
– Branches: to date only foreign banks, law firms are licensed to establish branches to provide services in Vietnam.
– Presence under the Law on Foreign Investment (joint venture, enterprises with wholly foreign owned capital or business cooperation contracts): the issuance of license to foreign investor is subject to market policy of Vietnam which vary for different industries and for different foreign countries.
There is no provision of the laws requesting a foreign company to establish a local presence in Vietnam in order to provide service into Vietnam. Foreign company who do not have commercial presence in Vietnam still can provide services in Vietnam. However, a number of foreign company consider the establish establishment qualified to do business in Vietnam in order to participate in projects that are available to domestic contractors or the project where priority is given to domestic contractors.
III. Source Country Tax Considerations for Employees of a Foreign Service Provider
If a nonresident, noncitizen of your jurisdiction employed by a foreign company is providing services in your jurisdiction, at what point does that individual become liable to personal income tax in your jurisdiction?
A nonresident, noncitizen of Vietnam who is employed by a foreign company to perform service contacts in Vietnam will be subject to Vietnamese personal income tax. The tax liability will depend on the duration of his/her staying in Vietnam.
Foreigners are taxed on their Vietnam-sourced income if they do not spend more than 183 days a year in Vietnam or do not have a permanent residence in Vietnam or lease house under a definite term contract. Foreigners are taxed on their worldwide income once they spend over 183 days a year in Vietnam; or have a permanent residence in Vietnam or lease house under a definite term contract. Foreign nationals who spend 183 days or more in Vietnam and Vietnamese nationals are considered Vietnam tax residents for most tax treatment purposes.
Foreign non-residents are taxed based on sources of income at a fix rate (from 0.1% to 20%).
IV. Tax Considerations in the Jurisdiction of Residence/Incorporation of the Legal Entity Providing Services Abroad
A. Does your jurisdiction impose tax on the worldwide income of a company resident in/incorporated in your jurisdiction or only on income with a local source? If a company incorporated in or resident in your jurisdiction is providing services overseas and is earning income from those services, is that income subject to income tax in your jurisdiction?
Vietnam imposes tax on the worldwide income of a company resident in/incorporated in Vietnam [7]. A company incorporated in or resident in Vietnam providing services overseas and earning income from those services also have to pay EIT on income for income from service provided abroad.
B. If your jurisdiction does impose tax on such foreign source income, what is the applicable rate of income tax?
With respect to foreign invested enterprises, the rate applicable to this income is the rate applicable to enterprise income which is specified in the Investment License of the FIE. The standard rate is 22%, however, many FIEs enjoy preferential rates (e.g., 10%, 15% or 20%), which are granted based on a number of factors.
At present, branches of banks and law firms in Vietnam are subject to the rate of 22% as FIEs.
C. Does your jurisdiction offer any tax incentives for the provision of certain types of services or for the provision of services overseas?
VAT: Exempted from VAT [8]
– Services of credit granting and financial leasing; investment funds;
– Life insurance, insurance for student, livestock and crop/plant insurance and other non-business insurance;
– Health care service;
– Education and professional training;
– Public service such as sanitation, drainage, maintenance of zoos, parks, public gardens, public lighting, funeral service;
– Maintenance, repair and construction of cultural, artistic works, public works, infrastructure projects and charity house; and
– Public transportation.
50% VAT reduction [9]:
– Construction and installation services;
– Transportation, load/unload services; and
– Hotel, tourism and restaurant services
5% of VAT [10]:
– Clean water supply;
– Technical and scientific service; and
– Service directly serving agricultural services.
EIT: newly set up enterprises in geographical areas with socioeconomic difficulties or in domains eligible for special support are granted preferential tax rates of 10 or 20%, in some cases for an unlimited period [11]. In practice, FIEs usually pay no enterprise income tax if they incur losses since income tax is levied on profits.
Tax incentives include so called “Tax Holidays” which may last four years and be followed by a 50% reduction of payable tax amounts for nine subsequent years [12]. The tax exemption or reduction duration is counted from income or turnover in the first fiscal year [13]. Under the previous law, foreign investors who reinvested after-tax profits were eligible to apply to the Ministry of Finance for refund of the paid EIT. Unfortunately, this regulation has been abolished by the new Law on Investment.
V. Transfer Pricing
A. Does your jurisdiction have transfer pricing rules that apply to intercompany services? If so, please briefly describe the key points.
The transfer pricing rules are stipulated in regulations on tax management and Circular No. 66/2010/TT-BTC dated 22 April 2010.
Measures for anti-transfer-pricing are used for preventing the transfer pricing in transaction among affiliates. In case where the tax authority find absurdity in the prices or profit ratio in transaction among affiliates, it has the right to impose “market price” for determining taxable profits of the enterprises involved. To determine the “market price” the tax authority will use the price that the enterprise involve use in transaction with non-affiliates, or the price of the similar goods or services in the market with taking into account the differences in conditions of transactions such as quality of goods and services, trade mark, goods delivery conditions, payment.
B. Does your jurisdiction accept the principle that no intercompany charge is required for services provided by a parent company in the nature of “stewardship” or looking after its investment?
Yes.
In inbound investment: Inter-company charge may be in 2 manners: (i) allocation of management costs and (ii) provision of management service. Branches are allowed to use manner (i) while FIEs are allowed to use manner (ii) only. Branches and FIEs may present certain proof so that the intercompany charge is deductible from their taxable income but are not compulsory to do so.
In outbound investment: the inter-company charge is not the issue from tax perspective as the income of the offshore establishment will also be accounted together with those of the headquarters.
C. How does your jurisdiction treat cost sharing payments for tax purposes?
Depending on the nature of the enterprises (branches of FIEs) the cost sharing payment should be structured as the allocation of management costs or the provision of management services.
Please contact Oliver Massmann under omassmann@duanemorris.com if you have any questions on the above. Oliver Massmann is the General Director of Duane Morris Vietnam LLC. Thank you.
[1] Decree No. 70/2014/ND/CP on detailing certain provisions of the Ordinance on Foreign Exchange and the Ordinance on amending and supplementing certain provisions of the Ordinance on Foreign Exchange promulgated by the Government on July 17, 2014 – Article 5.1.
[2] Decree No. 70/2014/ND/CP on detailing certain provisions of the Ordinance on Foreign Exchange and the Ordinance on amending and supplementing certain provisions of the Ordinance on Foreign Exchange promulgated by the Government on July 17, 2014 – Article 5.2.
[3] Ordinance No. 28/2005/PL/UBTVQH11 dated December 13, 2005 on Foreign Exchange – Article 22, as amended by Ordinance No. 06/2013/UBTVQH13 dated 18 March 2013.
[4] Circular No. 32/2013/TT-NHNN on guiding the implementation of regulations restricting use of foreign currencies in the territory of Vietnam by the State Bank of Vietnam on 26 December 2013– Article 4.
[5] Ordinance on Procedures for Handling of Economic Cases stipulates a statutory limitation for initiating a litigation of only 6 months for economic disputes including disputes relating payment raised from the economic contracts (Article 31.1)
[6] Circular No. 169 – Clause C.2
[7] EIT Law – Article 6
[8] VAT Law – Article 5
[9] Decree 78/1999 dated August 20, 1999 – Article 1.3
[10] VAT Law – Article 8.2
[11] Art. 13 CIT, as amended by Article 1, paragraph 6 of the Law No. 32/2013/QH13.
[12] Art. 14 CIT
[13] Article 14, paragraph 1, CIT, as amended by Article 1, paragraph 8 of the Law No. 32/2013/QH13.