The issue of contractor tax seems difficult at first, but in fact it is only in the types of taxes such as VAT, CIT, the only difference is that the taxable subjects and the applicable cases are different from normal cases, specifically the difference is that these subjects do not form a legal entity or company to be able to declare and pay taxes normally but pay taxes through the contractor tax code, can pay taxes themselves or the payer is responsible for withholding the contractor tax and paying on behalf of others.
People often ask what is difficult about contractor tax, but reading it over and over again feels a bit confusing, that’s right, the difficulty of contractor tax is determining whether that case is subject to contractor tax? And what is the value of calculating contractor tax? And the cases of calculating contractor tax are extremely complicated and have many situations. So to overcome confusion and not knowing whether you are doing it right or not, you must understand the nature of this tax. That is taxing due to income in Vietnam, the Vietnamese side pays money, there are some cases of payment but do not have to pay contractor tax, which are cases of not consuming in Vietnam or encouraging trade promotion, which is beneficial to Vietnam, there will be a tax exemption policy, and what is difficult to understand in nature is the purpose of tax management, meaning that the tax authority in that case is risky for management, then the rigid tax regulations are also the responsibility of the management agency. Therefore, we not only understand the nature but also have to read all the regulations to comply in a way that minimizes risks.
The first thing to grasp is the permanent establishment and permanent headquarters:
According to the definition of permanent establishment and permanent headquarters in Vietnam according to Circular 205/2013/TT-BTC:
1.2. Definition of permanent establishment
1.2.1. According to the provisions of the Agreement, a “Permanent Establishment” is a fixed place of business of an enterprise, through which the enterprise carries on all or part of its business activities.
An enterprise of a Contracting State is considered to have a permanent establishment in Vietnam if it satisfies all three of the following conditions:
a) It maintains in Vietnam an “Establishment”, such as a building, an office or part of a building or office, a vehicle or equipment, etc.
b) This permanent establishment must be fixed, meaning that it must be established at a specific place or maintained on a regular basis. The permanence of a business establishment does not necessarily depend on the fact that it must be attached to a specific geographical location for a certain period of time
c) The enterprise carries on all or part of its activities through this establishment.
3.2. For non-individuals
Depending on the specific provisions of each agreement to determine whether the subject is a resident of Vietnam. The agreements often stipulate the following criteria:
a) If the subject is established and registered to operate in Vietnam, it is considered a resident of Vietnam; or
b) If the subject has a head office in Vietnam, it is considered a resident of Vietnam; or
c) If the subject has a de facto headquarters in Vietnam, it is considered a resident of Vietnam (the de facto headquarters is usually where senior officials or the board of directors of the enterprise meet, consider, discuss and make management decisions or decisions on production and business of the enterprise or where the most important accounting books are kept); or
d) In case that entity is established or registered in both countries or has its head office or effective place of management in both countries, the competent authorities of Vietnam and the competent authorities of the Contracting State to the Agreement with Vietnam shall determine that entity as a resident of only one of the two countries through the bilateral agreement procedure. In case the two Contracting States do not reach a common agreement, that entity shall not be considered a tax resident of any country for the purpose of applying the Agreement.
The above provisions on the subject of residence are stated in the Article on Residents (usually Article 4) of the Agreement.
One thing that people always ask is that if a contractor entering Vietnam to do business using the mixed method must keep books, does it have to submit an audit report?
In terms of the nature of the report, it should be audited to ensure accurate data, but from the current regulatory perspective, there is no mandatory regulation for this subject to be audited, possibly because the risks in the records for these projects are strictly controlled by the tax authority. Therefore, up to now, auditing is only encouraged but not required.
Regarding the method of choosing declaration, we would like to share about the selection method based on the estimated calculation of the tax payable for the entire project, giving options, choosing the best option with the lowest tax payable value.
The current problem is that the options are selected according to the circular, but when working with the tax authority, they may not approve the options for the company, for example:
If the company chooses the option of paying VAT by the direct method, it is beneficial, but the tax authority argues that if the following 2 conditions 1 and 2 are satisfied, it must declare and deduct regardless of the 3rd condition and requires the project to comply.
1. Having a permanent establishment or being an individual residing in Vietnam
2. The business term in Vietnam under the contractor contract or subcontract is from 183 years or more, calculated from the effective date of the contractor contract or subcontract.
3. Applying the Vietnamese accounting regime, registering for tax and having a tax code from the tax authority.
Main content to grasp:
VAT
In case a foreign contractor signs a contract with a Vietnamese subcontractor or a foreign subcontractor paying tax by the declaration method or a foreign subcontractor paying tax by the mixed method to transfer a part of the value of work or items to a subcontractor as stipulated in the Contractor’s Contract signed with the Vietnamese Party and the list of Vietnamese subcontractors and foreign subcontractors performing the corresponding part of work or items is listed with the Contractor’s Contract, the VAT taxable revenue of the foreign contractor does not include the value of work performed by the Vietnamese subcontractor or foreign subcontractor (according to paragraph b.2, point 1, article 12, Circular 103/2014/TT-BTC)
In case a foreign contractor signs a contract with a foreign subcontractor paying tax by the direct method, the Vietnamese Party shall declare and pay VAT on behalf of the foreign contractor or foreign subcontractor at a percentage rate to calculate VAT on the revenue corresponding to the business line in which the foreign contractor is operating. foreign subcontractor performs according to the bidding contract, subcontract. The foreign subcontractor is not required to declare and pay VAT on the value of the work performed by the foreign subcontractor according to the provisions of the subcontractor contract signed with the foreign contractor that the Vietnamese Party has declared and paid on its behalf (paragraph b.3, point 1, article 12, circular 103/2014/TT-BTC).
Corporate Income Tax
In case a foreign contractor signs a contract with a Vietnamese subcontractor or a foreign subcontractor that pays tax by the declaration method or a foreign subcontractor that pays tax by the mixed method to transfer a part of the value of the work or items specified in the Contractor’s Contract signed with the Vietnamese Party and the list of Vietnamese subcontractors and foreign subcontractors performing the corresponding part of the work or items is listed with the Contractor’s Contract, the revenue subject to corporate income tax of the foreign contractor does not include the value of the work performed by the Vietnamese subcontractor or
the foreign subcontractor (paragraph b.2, point 1, article 13, circular 103/2014/TT-BTC)
In case a foreign contractor signs a contract with a foreign subcontractor that pays tax by the direct method, the Vietnamese Party shall declare and pay corporate income tax on behalf of the foreign contractor or
the foreign subcontractor at the corporate income tax rate (%) calculated on the taxable revenue corresponding to the business line that the foreign contractor or foreign subcontractor performs under the contractor contract or subcontract contract. The foreign subcontractor is not required to declare and pay corporate income tax on the value of the work performed by the foreign subcontractor according to the provisions of the subcontract contract signed with the foreign contractor that the Vietnamese party has declared and paid on its behalf (paragraph b.3, point 1, article 13, circular 103/2014/TT-BTC)
TTT Company Limited (headquartered in Korea), this company has opened a representative office in Vietnam. We would like to ask, when the Company has income arising from Vietnam due to the provision of goods with accompanying services to a Vietnamese Company, can the Company’s representative office pay contractor tax on behalf of the Company?
Answer
Pursuant to Clause 3, Article 20, Circular 156/2013/TT-BTC dated November 6, 2013 of the Ministry of Finance guiding the implementation of a number of articles of the Law on Tax Administration, providing general provisions on declaration of value added tax and corporate income tax for foreign contractors and foreign subcontractors.
“Article 20. Declaration of value added tax and corporate income tax for foreign contractors and foreign subcontractors.
1. Tax declaration for cases of paying VAT calculated directly on VAT, paying corporate income tax at a percentage rate calculated on revenue
a. Tax declaration for cases of paying VAT calculated directly on VAT, paying corporate income tax at a percentage rate calculated on revenue is the type of declaration for each time payment is made to a foreign contractor and the final settlement is declared upon the end of the contractor contract.
In case the Vietnamese party makes payments to the foreign contractor many times in a month, it can register to declare tax monthly instead of declaring each time a payment is made to the foreign contractor.
The Vietnamese party signing the contract with the foreign contractor shall deduct and pay tax on behalf of the foreign contractor and submit tax declaration and tax finalization declaration to the tax authority directly managing the Vietnamese party.
b. Tax declaration for business activities and other types of income
b.1) Tax declaration dossier:
Tax declaration form No. 01/NTNN issued with this Circular;
Copy of the contractor contract, subcontractor contract certified by the taxpayer (for the first tax declaration of the contractor contract);
Copy of the business license or practice license certified by the taxpayer…”.
Pursuant to Clause 2, Article 4, Circular No. 103/2014/TT-BTC dated August 6, 2014 of the Ministry of Finance guiding the implementation of tax obligations applicable to foreign organizations and individuals doing business in Vietnam or having income in Vietnam, guiding on contractor taxpayers:
Article 4 Taxpayers
2. Organizations established and operating under Vietnamese law, organizations registered to operate under Vietnamese law, other organizations and individuals engaged in production and business: purchasing services, services attached to goods or paying income arising in Vietnam on the basis of contractor contracts or subcontractor contracts; purchasing goods in the form of import and export at or under international commercial terms (Incoterms); distributing goods and providing services on behalf of foreign organizations and individuals in Vietnam (hereinafter referred to as the Vietnamese Party), including:…
…Taxpayers as guided in Clause 2, Article 4, Chapter I are responsible for deducting the amount of value added tax and corporate income tax as guided in Section 3, Chapter II before making payments to foreign contractors and foreign subcontractors”.
Based on the above provisions, TTT Company (Korean) has income arising in Vietnam on the basis of contracts and agreements with Vietnamese enterprises, TTT Company does not register to pay taxes in Vietnam, then the Vietnamese buyer is responsible for deducting, declaring, and paying foreign contractor tax (VAT and CIT) before making payments to TTT Company, TTT Representative Office is not allowed to pay contractor tax on behalf of TTT Company.
When is the deadline for registering a tax code/contract for contractor tax?
Answer
The deadline is within 20 days from the date of signing the contract.
Contractor tax when warranty activities and transactions with independent third parties arise
Company A (in Korea) sells machinery/goods to company B (in Vietnam): Company A signs a contract with company B without any accompanying services.
Company B (in Vietnam) signs a contract with company C (in Vietnam) to perform installation services for the above machinery.
The above are two different contracts and there is no relationship between the two contracts. The question is: Does Company A have to pay contractor tax?
If the service contract is a warranty service, is there contractor tax?
Answer
Company A only supplies goods without any accompanying services. Therefore, it is a normal sale of goods transaction, so Company A does not have to pay contractor tax.
According to Circular 103/2014/TT-BTC, it is also confirmed that even if the contract mentions a warranty clause, but in the end, there is no warranty activity occurring in Vietnam, it is not subject to contractor tax. (no specific clause)
Our company purchases goods from a company A that is a resident in Korea, however, Company A appoints a company B in Vietnam (B is a resident in Vietnam) to deliver the goods to our company in the form of on-site import and export. So, in this case, can the double taxation avoidance agreement between Vietnam and Korea be applied to the contractor tax that Company A must pay?
Answer
In Official Letter No. 1939/TCT-HTQT dated June 12, 2013 of the General Department of Taxation, there is guidance:
Foreign enterprises hire a Vietnamese enterprise after performing processing in Vietnam to, on behalf of the foreign enterprise, deliver/transport the goods to another enterprise also in Vietnam; or foreign enterprises purchase goods from enterprises in Vietnam and resell them to other independent enterprises in Vietnam in the form of on-site import and export, in which the Vietnamese enterprise (the enterprise that sold the goods to the foreign enterprise) on behalf of the foreign enterprise conducts activities such as: on-site export procedures, delivery of goods as designated by the foreign enterprise, storage of goods in Vietnam during the period of time when the goods have not been delivered, re-importing goods in the warehouse in case the goods do not meet quality standards, is considered a foreign enterprise that has conducted production/business in Vietnam through a fixed establishment (the processing enterprise or the selling enterprise.
Therefore, according to the provisions of Clause 1, Article 5 of the above Tax Agreement, a foreign enterprise is considered to have a permanent establishment in Vietnam.
“…a foreign enterprise is considered to have a permanent establishment in Vietnam. Therefore, a foreign enterprise
is obliged to pay corporate income tax (CIT) in Vietnam for with income earned from the performance of processing contracts or contracts for the purchase and sale of goods in Vietnam in the form of on-site import-export on the portion of profits allocated to the permanent establishment in Vietnam as prescribed in Clause 1, Article 7 of the above-mentioned Tax Agreement.”
Based on the above-mentioned provisions, in the case where the Company purchases goods from a foreign organization that is a resident of Korea and this foreign organization designates another enterprise in Vietnam to deliver goods to the Company in the form of on-site import-export, the foreign organization is considered to have a permanent establishment in Vietnam and is therefore not subject to contractor tax exemption under the Double Tax Avoidance Agreement between Vietnam and Korea as prescribed above.
“
There are also some small professional cases that may be subject to contractor tax, but the small value sometimes does not require much thought, choosing a safe solution and reasoning is acceptable: some construction or consulting contracts with experts sent to work, the hotel rental, food… even their salary must be subject to personal income tax, there are contracts with free services, support many other things that are not clear but have income generated in Vietnam, then must be subject to contractor tax as well as personal income tax of experts. Therefore, depending on the situation, you can choose a safe option to avoid fines related to this collection.
“Contractor tax for services provided outside Vietnam
Responding to the official dispatch …/2019/CV-DSE dated December 26, 2019 of DSE Logistics Vietnam Co., Ltd. (hereinafter referred to as the Company) asking about the contractor tax policy for foreign transportation, the Tax Department of Ho Chi Minh City Hanoi has the following principled opinion:
– Pursuant to Circular No. 103/2014/TT-BTC dated August 6, 2014 of the Ministry of Finance guiding the implementation of tax obligations applicable to foreign organizations and individuals doing business in Vietnam or having income in Vietnam:
+ Article 1 stipulates the subjects of application;
“The guidance in this Circular applies to the following subjects (except for the cases specified in Article 2, Chapter I):
1. Foreign business organizations with permanent establishments in Vietnam or without permanent establishments in Vietnam; foreign business individuals who are residents in Vietnam or not (hereinafter 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 or individuals or between foreign contractors and foreign subcontractors to perform part of the work of the contractor’s contract…”
+ Clause 3, Article 2 stipulates the subjects that do not apply:
3. Foreign organizations and individuals with income from services provided and consumed outside Vietnam.
Example 4:
Hong Kong Company H provides cargo handling services at the port in Hong Kong for the international shipping fleet of Company A in Vietnam. Company A must pay Company H a fee for cargo handling services at the port in Hong Kong.
In this case, cargo handling services at the port in Hong Kong are services provided and consumed in Hong Kong, so they are not subject to tax in Vietnam.
Based on the above provisions, in the case where the Company hires foreign enterprise D to transport goods in the US, the income from services provided and consumed outside Vietnam is not subject to contractor tax according to the provisions of Article 2 of Circular No. 103/2014/TT-BTC.
Solution
The most difficult thing about contractor tax is that the Company always tries to avoid the prescribed cases to have favorable tax transactions when generating income in places in Vietnam, but sometimes there are rigid regulations that the Company should have handled skillfully and may not have to pay tax, so it is advisable to determine the best situation to prevent possible risks before they happen, Contact us for a more detailed discussion for the Company’s situation.
The issue of permanent establishment is an issue that needs to be grasped to be able to determine whether this case has or does not have contractor tax before going into the details of calculation and declaration, so the issue of understanding the permanent establishment guides the work and does not greatly affect related work.