WHO MUST PAY FOREIGN CONTRACTOR TAX? - OTIS LAWYERS

Vietnamese businesses today must be very familiar with a type of tax: foreign contractor tax. So are only foreigners obliged to pay this tax in Vietnam? Find out with OTIS LAWYERS to learn about contractor tax and who must pay foreign contractor tax in the article below!

What is foreign contractor tax?

Foreign Contractor Tax (FCT) is a tax applied to foreign organizations and individuals (not operating under Vietnamese law) that generate income from providing services or services associated with goods in Vietnam.

FCT is understood as a tax applicable to foreign contractors and foreign subcontractors when doing business or earning income in Vietnam.

In there:

• Foreign contractor: An organization established under foreign law or an individual with foreign nationality participating in bidding in Vietnam (According to the provisions of Clause 37, Article 4 of the 2013 Bidding Law). Foreign contractors can be general contractors, main contractors, joint venture contractors, or subcontractors.
• Foreign subcontractor: A contractor participating in implementing the bidding package under the contract signed with the main contractor. According to Clause 2, Article 3 of Circular 103/2014/TT-BTC, foreign subcontractors belong to the group of subcontractors.

FCT includes the obligation to pay VAT, CIT and PIT. These taxes are considered when income arises in Vietnam.

Subjects paying foreign contractor tax

Objects subject to contractor tax 

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

Objects subject to FCT 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 and 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, 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.

Subjects paying contractor tax

Contractor taxpayers are specified in Article 4 of Circular 103/2014/TT-BTC as follows:

Foreign contractors and foreign subcontractors ensure business conditions in Vietnam or have income in Vietnam.

Business is conducted on the basis of contractor contracts with Vietnamese organizations and individuals or with other foreign organizations and individuals doing business in Vietnam on the basis of subcontractor contracts.

Determination of foreign contractors and foreign subcontractors that have a permanent establishment in Vietnam, or are residents in Vietnam is carried out in accordance with the provisions of the Law on Corporate Income Tax, the Law on Personal Income Tax, and implementation guidance documents.

In case the Double Taxation Avoidance Agreement signed by the Socialist Republic of Vietnam has different provisions on permanent establishments and residents, the provisions of that Agreement shall comply.

Organizations established and operating under Vietnamese law, organizations registered to operate under Vietnamese law, other organizations and individuals engaged in production and business:

- Purchase services, services attached to goods or pay income arising in Vietnam on the basis of contractor contracts or subcontractor contracts;

- Purchasing goods in the form of on-site import and export or according to international trade terms (Incoterms);

- Distributing goods and providing services on behalf of foreign organizations and individuals in Vietnam including:

+ Business organizations established under the Enterprise Law, Investment Law and Cooperative Law;

+ Economic organizations of political organizations, socio-political organizations, social organizations, socio-professional organizations, armed units, public service organizations and other organizations;

+ Oil and gas contractors operating under the Petroleum Law;

+ Branches of foreign companies are allowed to operate in Vietnam;

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

+ Ticket offices and agents in Vietnam of foreign airlines have the right to transport to and from Vietnam, directly or in joint venture;

+ Organizations and individuals providing maritime transportation services of foreign shipping companies; Agent in Vietnam of logistics companies and foreign delivery companies;

+ Securities companies, securities issuing organizations, fund management companies, commercial banks where securities investment funds or foreign organizations open securities investment accounts;

+ Other organizations in Vietnam;

+ Individuals producing and doing business in Vietnam.

Tax rates and tax calculation

According to Circular 103/2014/TT-BTC, the foreign contractor tax rate is based on the taxpayer and the type of tax to be paid.

Corporate income tax rate for foreign contractors

The corporate income tax rate is calculated according to the business sector of the foreign contractor. Details of corporate income tax rates are shown in the following table:

Personal income tax rate for foreign contractors

For non-resident foreign individuals, the personal income tax rate is 20% and does not include family deductions.

For individuals residing in Vietnam, personal income tax is calculated at the same tax rate as Vietnamese people.

VAT rate for foreign contractors 

The VAT rate that foreign contractors must pay is shown in the following table:

Instructions for declaring FCT

In cases where foreign taxpayers are not eligible to declare and pay taxes themselves (the Vietnamese party is the party that must declare and pay taxes on their behalf)

Step 1: Determine whether the foreign party providing the service or goods attached to the service is subject to foreign income tax law? (See Article 1, Circular 103/2014/TT-BTC)

Step 2: If subject to the foreign income tax law, continue to determine whether the Vietnamese party or the foreign party is the party that must declare and pay foreign income tax (See Article 8, Circular 103/2014/TT-BTC)

• If you are from Vietnam, continue with step 3 onwards
• If it is a foreign party, the Vietnamese party only needs to fulfill its contractual payment obligations as with Vietnamese suppliers without having to declare and pay foreign income tax.

Step 3: From the date of signing the contract with the foreign contractor, within 20 days, the Vietnamese enterprise shall notify the tax authority in writing and register for tax (issue a 10-digit tax code for non-registered tax contractors in Vietnam) at https://thuedientu.gdt.gov.vn/.

Step 4: 10 days from the date of payment to the foreign contractor (the amount after withholding foreign income tax), the Vietnamese party declares and pays foreign income tax

Step 5: Tax finalization

For cases where foreign taxpayers are eligible to declare and pay taxes themselves

Follow the instructions of VAT law and corporate income tax law. (See also VAT Handbook and Corporate Income Tax Handbook).

Tax accounting services of OTIS LAWYERS

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