Learning Objectives On completion of this course, you will be able to: 1. Identify the scope of the foreign contractor tax (FCT) regime a. Applicable and non-applicable objects/ transactions b. Explain the inter-relationship between FCT regime and CIT, VAT and PIT c. Define the terms “Foreign contractor”, “Sub-contractor”, “Income arising in Vietnam”, “Income from the transfer of ownership or right to use assets”, “Royalty”, and “Loan interest”
Learning Objectives 2. Compute the FCT liabilities a. of VAT and CIT liabilities for foreign contractors adopting the Vietnamese Accounting System (VAS) b. Computation of VAT and CIT liabilities for foreign contractors NOT adopting the Vietnamese Accounting System (VAS) c. Application of the double taxation relief provisions in the context of the FCT regime
Applicable objects/ transactions WHO ARE FOREIGN CONTRACTORS (2/3) Foreign organisations with or without a permanent establishment (PE) in Vietnam, and foreign a resident or a non-resident of Vietnam, (briefly called Foreign Sub- Contractors ), doing business in Vietnam or having income arising from Vietnam on a basis of a contract (or an agreement, a commitment) signed with a Foreign Contractor to perform a part of the Foreign Contractor’s contract
Applicable objects/ transactions WHO ARE FCT PAYERS? (2/6) Foreign parties : Foreign contractors and/or foreign sub-contractors who do business in Vietnam (including the sea territories) or have income arising from VN The business activities are conducted on a basis of: a contractor’s with a Vietnamese organisation/ individual, or a subcontractor’s contract signed with another foreign organisation/ individual who is currently doing business in VN
Non-applicable THERE ARE 4 CASES objects/ transactions 1. Foreign organisations/ individuals business in VN under the Law on Investment , Law on Petroleum , Law on Credit Organisations 2. Foreign organisations/ individuals providing goods to a Vietnamese without accompanying services to be carried out in VN – See Example 2 3. Foreign organisations/ individuals having income from services that are provided and consumed outside VN 3 4. Foreign organisations/ individuals providing a number of services to a Vietnamese party where the services are performed outside VN – See Example 4
Withholding Method TAXABLE TURNOVER FOR VAT (1/8) Taxable turnover for VAT calculation of a foreign contractor is the turnover from provision of service, or services attached to VAT-able goods, before all of tax (including VAT), receivable by a foreign contractor or a foreign sub-contractor, plus ( + ) all the costs born by a Vietnamese party of a foreign contractor and/or a foreign sub- contractor, if any on behalf
Withholding Method DEEMED VALUE ADDED RATES (1/4) No Business activities Deemed value added (%) 1 2 3 4 Services, equipment leasing, insurance Construction, installation with materials or equipment Construction, installation without materials or equipment Transportation, manufacturing, other businesses 50 30 50 30
Withholding method ASSESSMENT OF CIT PAYABLE The for CIT assessment is the Taxable turnover and the Deemed CIT (%) CIT Payable = Taxable turnover * Deemed CIT rates What is Taxable turnover ? What are Deemed CIT rates ?
Withholding method TAXABLE TURNOVER FOR CIT (2/12) In case of a NET contract, the taxable turnover must be grossed up in accordance with the below formula Taxable turnover = Turnover before CIT (1 – % deemed CIT rate) See Example on the next Slide
Withholding method TAXABLE TURNOVER FOR CIT (5/12) Example Foreign F enters into a construction service with a Vietnamese party to construct a cement plant in VN at a contract amount of USD10 million . Foreign contractor F sub-contracts a part of work to a Vietnamese contractor, at a cost of USD1 million . The taxable turnover of Foreign contractor F is calculated as follows: Taxable turnover for CIT = USD10 mil - USD1 mil = USD9 mil
Withholding method TAXABLE TURNOVER FOR CIT (7/12) Example Airlines F has a total sales of USD100,000 for the 1st quarter 2009, of which, sale of air tickets: USD85,000 sale of airways bills: USD10,000 sales of MCO (Miscellaneous Charges Order): USD5,000 . The airlines also receives airport fees of USD1,000for the State, and accept tickets returned from customers amounting to USD2,000 . Taxable turnover of airlines company F is calculated as follows: Taxable turnover =100,000 - (1,000 + 2,000)= 97,000 for CIT Note: See FCT declaration for airlines in Cir. 134
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Withholding method TAXABLE TURNOVER FOR CIT (9/12) Example Company A (VN) , agent of a foreign sea transport firm, i.e. Company F , to transport goods, issue invoices and collect fees Company B (VN), through Company A , hires Company F to transport goods from VN to USA at a fee of USD100,000 Company A hires Company B to transport goods from VN to Singapore in for Company F to continue to transport goods from Singapore to USD, at a fee of USD20,000 . Taxable turnover of Company calculated as follows: USD100,000 - USD20,000 = USD80,000
Withholding method Company A (VN): Agent of a foreign sea transport firm - Company F - to transport and collect fees USD100,000 VN SIN Company B (VN) : Transporting goods from VN to SIN USD20,000 Company F : Transporting from VN to USA USA Taxable turnover for CIT: 100,000 – 20,000 = 80,000
Withholding method TAXABLE TURNOVER FOR CIT (9/12) Transport Enterprise VN Agent AAgent A SIN VAT Invoice USD100.000 VA T Invo USD80.000 ice BB US USD20.000 Taxable turnover for FCT: 80.000 Company VN 10% VAT on freight Company NNNN
Withholding method TAXABLE TURNOVER FOR CIT (11/12) For securities activity , the taxable turnover is: For securities transfer : the total transfer proceeds (excluding non-taxable For interest from bonds transfer : the total transfer proceeds (excluding non-taxable bonds) For interest offshore loans: Any contract signed after 1/1/1999 : taxable Any contract signed before 1/1/1999 : depending on the extension of loan contracts – See next Slide for details
Withholding method DEEMED CIT (1/6) No Business Activities Deemed (%) 1 2 3 4 5 6 7 8 9 Commerce: distribution, provision of goods attached with services Services, equipment leasing, insurance Construction Transportation, manufacturing, others Lease of aircraft, aircraft engines, aircraft accessories Re-insurance Securities transfer Interest income Royalty income 1 5 2 2 2 2 0.1
Withholding Method DEEMED CIT RATES (2/6) The deemed CIT apply to a foreign contractor’s contract that includes many activities as follows: A specific deemed CIT rate will to a specific activity if the value of each activity is clearly stated The highest deemed CIT rate will apply to the total contract value if the value of each activity is not clearly stated (a lump-sum contract)
Withholding Method DEEMED CIT RATES (3/6) The deemed CIT apply to a contract that provide accompanied by services like installation, commissioning, warranty, maintenance, … as follows: A specific deemed CIT rate will apply to a specific service and a specific deemed CIT rate will apply to goods, if the value of services is separated from the value of the goods The highest deemed rate (2%) will apply to the total contract if the value of services is not separated from the value of the goods (a lump-sum contract)
Withholding method DEEMED CIT RATES (4/6) Example Foreign contractor F provides equipment accompanying with services to a Vietnamese party to build a cement plant in VN, at a total contract value of USD70 mil , of which USD50 mil is equipment, USD5 design, USD10.5 construction, USD3 mil is supervision and USD1.5 training services Deemed CIT applied to this contract are as follows: 1% for equipment, 5% for design, 2% for construction, 5% for supervision, and 5% for training Deemed CIT rate of 2% will apply on the total contract value if the contract does not specify clearly