Tax of foreign contractors in Vietnam

Tax is currently of interest to many businesses and organizations and has become familiar. However, accounting for foreign contractor tax is not easy. So what information must businesses and organizations grasp about this type of tax? To answer customers’ questions, Law Firm Viet An provides an article on tax of foreign contractors in Vietnam foreign contractors ‘ taxes below.

Legal basis

• Law on Tax Administration 2019;
• Circular 103/2014/TT-BTC guides the implementation of tax obligations applicable to foreign individuals and organizations doing business in Vietnam or having income arising in Vietnam.

What is foreign contractor tax?

Foreign contractor tax is a tax applied to foreign organizations and individuals (not operating under Vietnamese law) that generate income from the provision of services or services associated with goods. in Viet Nam.

According to tax laws, foreign contractor tax includes the obligation to pay value-added tax (VAT) and corporate income tax (CIT) according to business regulations or have legal income in Vietnam.

Applicable subjects

According to the provisions of Article 1 of Circular 103/2014/TT-BTC dated August 6, 2014, it is stipulated as follows:

Subjects subject to contractor tax include:

• Foreign business organizations with permanent establishments in Vietnam or without permanent establishments in Vietnam; Foreign individuals doing business who are residents of Vietnam or not residents of Vietnam (hereinafter collectively referred to as Foreign Contractors, Foreign Subcontractors) doing business in Vietnam or having income arising in Vietnam on the basis of contracts, agreements, or commitments between foreign contractors and Vietnamese organizations and individuals or between foreign contractors and foreign subcontractors to perform part of the work of Contractor contract;
• Foreign organizations and individuals supply goods in Vietnam in the form of on-site import and export and generate income in Vietnam on the basis of contracts signed between foreign organizations, individuals, and businesses in Vietnam. Vietnam (except for processing and returning goods to foreign organizations and individuals) or distributing goods in Vietnam or providing goods according to the delivery conditions of international trade terms – Incoterms where the seller bears risks related to goods entering the Vietnamese territory;
• Foreign organizations and individuals carry out part or all of the business activities of distributing goods and providing services in Vietnam in which the foreign organizations and individuals are still the owners of the goods delivered to them. The Vietnamese organization is either responsible for the costs of distribution, advertising, marketing, service quality, and quality of goods delivered to the Vietnamese organization or determines the selling price of goods or service provision price; including cases of authorizing or hiring a number of Vietnamese organizations to perform part of distribution services and other services related to the sale of goods in Vietnam;
• Foreign organizations and individuals use Vietnamese organizations and individuals to negotiate and sign contracts in the name of foreign organizations and individuals;
• Foreign organizations and individuals exercise the right to export, import, and distribute in the Vietnamese market, buy goods for export, and sell goods to Vietnamese traders according to commercial law.

Applicable cases

Foreign organizations and individuals supply raw materials in the Vietnamese market in the form of import and export and generate revenue in the territory of Vietnam, on the basis of the signed contract of foreign organizations and individuals with businesses in Vietnam. Does not apply to cases of processed goods and goods returned to foreign organizations and businesses.

Organizations and individuals from abroad will have to carry out part or possibly all of the business activities to distribute goods and provide services in the Vietnamese market, including organizations, individuals from foreign countries will still be the owners of the goods delivered to Vietnamese organizations or will be responsible for distribution costs such as marketing, service quality, and products quality delivered to Vietnamese or designated organizations.

Method of paying tax and calculating foreign contractor tax

Declaration method

With this method, foreign contractors pay VAT according to the deduction method and pay corporate income tax on the basis of revenue declaration, similar to businesses established in Vietnam.

Applicable objects of the method include:

• Have a permanent establishment in Vietnam or reside in Vietnam.
• The business term in Vietnam according to contractor contracts and subcontractor contracts is over 183 days from the effective date of the contractor contract and subcontractor contract.
• Apply Vietnam’s accounting regime carry out tax registration, and be granted a tax code by the tax authority.

Direct method

This method applies to cases where foreign contractors do not meet one of the conditions to apply tax payment by the declaration method, and then pay tax by the direct method. Pay VAT and corporate income tax according to the percentage-to-revenue calculation method.

For VAT:

• Amount of VAT payable = Revenue subject to VAT (×) Percentage of VAT calculated on revenue.

For corporate income tax:

• Amount of corporate income tax payable = Revenue calculated for corporate income tax (×) Percentage of corporate income tax calculated on revenue.

Mixed method

With the mixed method, foreign contractors pay VAT according to the deduction method and pay corporate income tax according to the percentage of revenue.

Applicable subjects of the deduction method include:

• Have a permanent establishment in Vietnam or reside in Vietnam.
• The business term in Vietnam according to contractor contracts and subcontractor contracts is over 183 days from the effective date of the contractor contract and subcontractor contract.
• Organize accounting according to the provisions of accounting law and instructions of the Organizing Committee.

How to calculate foreign contractor tax

Calculated according to Net price (in case the contract value does not include tax )

VAT = Revenue subject to VAT (×) Percentage to calculate VAT calculated on revenue

• Revenue subject to VAT = Revenue excluding VAT / (1 – Percentage to calculate VAT on revenue)

Corporate income tax = Corporate income taxable revenue (×) Corporate income tax ratio calculated on taxable revenue

• Revenue subject to corporate income tax = Revenue excluding corporate income tax / (1 – Ratio of corporate income tax calculated on taxable revenue)

Calculated according to Gross price (in case the contract value includes tax )

VAT = Contract value (×) Percentage to calculate VAT on revenue

Corporate income tax = (Contract value – VAT) (×) Corporate income tax rate

In case the contract value does not include VAT (corporate income tax paid by the contractor)

VAT = Revenue subject to VAT ( × ) Percentage of VAT calculated on revenue.

Revenue subject to VAT = Contract value / (1 – Percentage to calculate VAT on revenue)

Corporate income tax = Contract value ( × ) Corporate income tax rate

Some related questions

How long does it take to register for foreign contractor tax?

The time limit for contractor tax registration is 10 days from the date the responsibility to deduct and pay tax on behalf of the foreign contractor or subcontractor arises.

Is foreign contractor tax deductible?

If using the declaration method, foreign contractors will be allowed to pay taxes similar to Vietnamese enterprises and receive deductions according to regulations.

Is corporate income tax paid to foreign contractors counted as an expense?

Corporate income tax paid to foreign contractors is not counted as a deductible expense in contractor contracts and foreign subcontractor contracts content not clearly stated: Revenue received by foreign contractors and subcontractors does not include corporate income tax.

Customers who need advice on tax of foreign contractors in Vietnam, please contact Viet An Law Firm – Tax Agent, hotline (+84) 9 61 67 55 66 (WhatsApp, Viber, Zalo, Wechat) for the best support.