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Vietnam Revises Application of Foreign Contractors Tax

Circular 103/2014/TT-BTC, issued by Vietnam's Ministry of Finance on 6 August 2014, revises the rules for the Foreign Contractors Withholding Tax (FCWT).

FCWT is the method for applying enterprise income tax (EIT) and value added tax (VAT) on certain business carried out in Vietnam by foreign companies or Individuals that have no licensed business presence in the country. FCWT also applies if a foreign company or individual has a permanent establishment in Vietnam, unless certain conditions are met.

The changes include the scope of application and the various tax rates applied.

Scope of application is expanded to include:

  • Goods distributed or supplied under Incoterms where the foreign seller bears the risk - previously FCWT only applied under Delivered at Terminal, Delivered at Place, and Delivered Duty Paid terms
  • When the foreign seller wholly or partly distributes goods or furnishes services in Vietnam, and any one of the following conditions is met:
    • They retain ownership of the goods
    • They are responsible for the quality of the goods/services sold and bear the related distribution, marketing and advertising costs, or
    • They have the authority to determine the selling price of the goods/services
  • When the foreign seller conclude contracts in their own name via authorized Vietnamese entities and individuals
  • When the foreign seller is involved in the export/import and distribution of goods in Vietnam

FCWT is not applied:

  • When warranty services are provided in relation to a supply contract that includes a warranty clause, as long as the warranty services are not carried out in Vietnam
  • When a customs bonded warehouse or inland container depot port is used to store goods for international transport, transit, transshipment or for further processing by a Vietnamese company

Tax Rate Changes:

  • The deemed VAT rate for oil and gas services is increased from 5% to 10% (from 7% to 10% for drilling services)
  • The deemed VAT rate for other services is decreased from 3% to 2%
  • Compensation received from a Vietnamese entity for breach of contract may be taxed at a deemed flat rate of 2%, or at the standard EIT rate of 22% (2014) using the actual profit method
  • Construction work and installation services, including equipment supplies, will be taxed at an EIT rate of 2% and a VAT rate of 3% when the value of the construction work, services and equipment supplied cannot be segregated - if they can be segregated, the following rates apply:
    • Construction work - 2% CIT and 3% VAT
    • Installation services - 5% EIT and 5% VAT
    • Equipment - 1% CIT and no VAT

The revised rules apply from 1 October 2014.

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