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Vietnam foreign contractor tax: how it works for foreign firms

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Vietnam foreign contractor tax is a set of taxes on money that a foreign company earns from a customer in Vietnam. It has two parts: value-added tax (VAT) and enterprise income tax. Circular 103/2014/TT-BTC, issued by the Ministry of Finance on 6 August 2014, sets the rules. This guide shows who must pay, the three ways to work out the bill, and how to register.

Sources: Ministry of Finance, Circular 103/2014/TT-BTC, Articles 1, 4 and 17 (English text); DFDL, "Circular 103/2014/TT-BTC on foreign contractor tax."

Who must pay

The rules cover foreign companies and foreign business people who earn income in Vietnam under a contract with a Vietnamese party. They also cover foreign subcontractors who do part of that work. A foreign firm does not need an office in Vietnam to fall under them.

Selling goods can also count. The circular reaches goods sold on the spot inside Vietnam. It also reaches goods shipped under delivery terms where the seller carries the risk after the goods enter Vietnam. Services tied to goods, such as installation, a test run, warranty or maintenance, are taxed with them.

Some cases sit outside the circular. One is a plain sale where the buyer takes the goods at a border gate and no services are given in Vietnam. Firms working under the Law on Investment, the Law on Petroleum or the Law on Credit Institutions are also outside it. A tax treaty between Vietnam and the contractor's home country can change the result, and the circular says the treaty wins.

Sources: Ministry of Finance, Circular 103/2014/TT-BTC, Articles 1, 2, 7 and 17.

What taxes apply

A foreign company pays both VAT and enterprise income tax. A foreign individual in business pays VAT and personal income tax instead. Other taxes and fees still follow their own laws.

The taxable amount is the full contract revenue. That includes costs the Vietnamese party pays for the contractor. If the contract says the price is "net of tax," the tax is added back by a formula. The net price is divided by one minus the tax rate.

Sources: Ministry of Finance, Circular 103/2014/TT-BTC, Articles 5, 12 and 13.

The three calculation methods

The circular offers three methods. Which one applies depends on the contractor's setup in Vietnam.

The first is the declaration method. A contractor can use it if it has a permanent establishment or is a resident in Vietnam. It must also work in Vietnam for at least 183 days from the start of the contract. And it must follow Vietnamese accounting and hold a tax code. Then it files its own VAT and income tax under the normal laws.

The second is the direct method. A contractor that misses any of those conditions falls here. The Vietnamese customer works out the tax, holds it back from each payment, and pays it to the state for the contractor. Tax is a fixed percentage of revenue.

The third is the hybrid method. It is for contractors that meet the conditions and keep proper cost accounts. They register to pay VAT by the credit method and income tax as a percentage of revenue.

Sources: Ministry of Finance, Circular 103/2014/TT-BTC, Articles 8, 11 and 14.

The rates under the direct method

The direct method uses a set rate for each type of work. The list below shows the main ones. Each rate is a share of contract revenue.

  • Services and equipment rental: VAT 5 percent, income tax 5 percent.
  • Construction and installation without materials: VAT 5 percent, income tax 2 percent.
  • Construction with materials or machinery supplied: VAT 3 percent, income tax 2 percent.
  • Trade in goods: income tax 1 percent.
  • Loan interest: income tax 5 percent. Copyright income: 10 percent.

If one contract mixes several kinds of work, each part gets its own rate when the contract lists the values apart. If it does not, the highest rate applies to the whole contract. For construction with materials, the lower combined rates of 3 percent for VAT and 2 percent for income tax apply instead.

Sources: Ministry of Finance, Circular 103/2014/TT-BTC, Articles 12 and 13.

How to register and stay compliant

Under the declaration or hybrid method, the contractor registers with the Vietnamese tax authority and receives a tax code. Under the direct method, the Vietnamese customer carries the filing duty. The customer withholds the tax before it pays the foreign firm.

A few habits keep trouble away. Read the circular's rules on taxable revenue before you sign. State in the contract whether the price includes tax. Split the contract value by type of work. Check your home country's tax treaty with Vietnam. The circular took effect on 1 October 2014 and replaced Circular 60/2012/TT-BTC. Contracts signed before that date stay under the rules in force when they were signed. Ask a licensed tax adviser about your own case.

Sources: Ministry of Finance, Circular 103/2014/TT-BTC, Articles 4, 8, 11, 14 and 17.

Sources

  • Ministry of Finance of Vietnam, Circular 103/2014/TT-BTC, 6 August 2014, English text published by Luat Viet Nam.
  • DFDL, "Circular 103/2014/TT-BTC on foreign contractor tax," legal and tax update.