Taxing of cross-border transactions

Foreign Contractor Withholding Tax (“FCWT”) is imposed on income offshore suppliers earn from supplying goods/services to a Vietnamese party under commitments or agreements, when that income is deemed Vietnam-sourced. FCWT does not impose a new type of tax. Rather, it refers to existing Value Added Tax (“VAT”) and income taxes (i.e. Corporate Income Tax (CIT) and Personal Income Tax (PIT)). While VAT and CIT calculations adhere to FCWT rules, PIT calculation and declaration on income earned by business individuals must conform to existing PIT regulations.

It is worth noting that from 1 January 2022, in additional to FCWT rules, new tax provisions came into effect to define the responsibilities of foreign providers that do not have permanent establishments in Viet Nam but conduct e-commerce, digital platform-based business and other services with organizations and individuals in Vietnam (hereinafter referred to as "Foreign E-Suppliers") to undertake tax registration, tax declaration and tax payment in Viet Nam, directly or through authorized organizations and tax agents operating under Vietnamese law.

FCWT calculation and declaration methods

Foreign contractors in Vietnam have three options for calculating and paying the FCWT: (i) the credit method, (ii) the withholding method, and (iii) the hybrid method. The selection of the appropriate method hinges on specific criteria as well as the tax planning of the foreign contractors depending on the nature of business activities performed in Vietnam.

The application of the credit and hybrid methods requires foreign contractors to meet certain criteria regarding the adoption of Vietnamese accounting standards and the existence of a Permanent Establishment in Vietnam. Otherwise, the withholding method will be applied. While the credit method would require foreign contractors to directly file tax returns and calculate tax based on actual expenses and revenue like local taxpayers, the withholding method requires the Vietnamese party to withhold and declare foreign contractor withholding tax (FCWT) on behalf of foreign contractors. The withholding method simplifies FCWT calculation by applying set percentages to taxable revenue. The rates vary depending on the goods supplied or services rendered.

* VAT is charged at import stage.

** Transfer of intellectual property rights according to the provisions of the Intellectual Property Law, computer software includes software products and software services as prescribed by law.

Taxation of cross border e-commerce and digital transactions

The rapid growth of e-commerce and digital transactions in Vietnam during COVID-19 has led to a major increase in B2C transactions by overseas suppliers selling directly to consumers. Previously, tax collection focused on B2B transactions through FCWT mechanism. However, the growth in B2C e-commerce creates risks of tax loss on these supplies made directly to consumers. To address this, Vietnam's tax authority has introduced new regulations requiring foreign e-commerce suppliers to register and file taxes directly in Vietnam as well as the coordination of financial institutions in tax collection from e-commerce and digital transactions. The new web portal launched by the General Department of Taxation of Vietnam in March 2022 facilitates this direct reporting and payment of tax by foreign e-suppliers on both B2B and B2C transactions. This aims to increase tax compliance and collection to match the growth in e-commerce, especially in the B2C space.

The tax amount to be paid in Vietnam in relation to taxable transactions includes VAT and CIT and is calculated as percentages on taxable revenue. It should be noted that unlike VAT of FCWT calculation, the VAT portion is not recoverable for the Vietnamese party in concern due to the lack of VAT invoice issued under Vietnamese invoicing regulations, as such, this cost should be considered by the parties at the price negotiation stage.

Tax rates on the provision of goods and services are as follows:

Tax relief under Double Tax Treaties

The CIT and PIT components can be exempt or reduced under Double Taxation Avoidance Agreements and Prevention of Fiscal Evasion (“DTA”) of which Vietnam is a member.

Vietnam has signed DTAs with 80 countries/territories worldwide, including Germany. In order to facilitate taxpayers’ understanding and application of the provisions of the DTAs between Vietnam and other countries/territories, the Ministry of Finance issued Circular No. 205/2013/TT-BTC dated December 24, 2013 guiding the implementation of DTAs with respect to Taxes on Income and on Capital between Vietnam and countries. This Circular took effect from February 6, 2014, replacing Circular No. 133/2004/TT-BTC dated December 31, 2004 of the Ministry of Finance.

Under Vietnamese tax regulations, procedures are in place to obtain double tax relief under DTAs, by submitting specified dossiers and documents to the tax authority within prescribed deadlines. Approvals or confirmations may be required from the tax authority for certain cases. The procedures aim to ensure taxpayers can properly access DTA benefits to alleviate double taxation. In particular, key procedures for alleviating double taxation under DTA as guided by Vietnamese tax regulations include:

• Apply for tax exemption/reduction – Requires submitting an application dossier to the tax authority within the statutory deadline and obtaining their approval.
• Claim tax refund – Requires submitting a request dossier for tax refund under the relevant DTA within the statutory deadline. There will be a tax audit conducted prior to tax refund.
• Claim foreign tax credit – Requires submitting a request dossier to claim a credit for taxes paid in the treaty partner country.
• Obtain certificate of tax residence – To prove eligibility for DTA benefits as a resident of Vietnam.
• Obtain confirmation of tax paid in Vietnam – As evidence to support foreign tax credit claims.
• Request mutual agreement procedure – To resolve disputes regarding the application of a DTA.