Currently, trade in goods is growing with the goal of boosting the economy. Therefore, in order to avoid foreign private enterprises and contractors enjoying 100% of interest and revenue from Vietnam without having to pay additional fees from business activities, FCT tax was born. So what is Foreign Contractor Tax and how is FCT tax calculated, who will be subject to FCT? Let’s answer through the following article.
What is Foreign Contractor Tax (FCT)?
Vietnam applies FCT (withholding tax) on transactions between foreign firms/sub-contractors and Vietnamese firms. Depending on contractor type, FCT components are VAT and either CIT or PIT.
To which transactions is Vietnam’s foreign contractor tax applicable?
The foreign contractor tax in Vietnam applies to businesses engaged in contracts with either Vietnamese parties or foreign contractors. The tax is applicable to the following transactions:
– The sale of goods or commodities within Vietnam by a foreign entity. This includes goods that remain under the ownership, quality control, pricing control, or incur distribution costs within Vietnam.
– Prohibiting the sale of goods or commodities that are related to services to be performed in Vietnam. This encompasses services such as installation, commissioning, maintenance, and related services.
– Vietnam provides various services such as repair, brokerage, and training (excluding online training) along with online advertising, marketing, and shared telecommunication services. The regulations outline specific service exemptions for tax exemption. For instance, services consumed entirely out of Vietnam and advertising and marketing (not online) performed outside Vietnam.
– The business can receive other forms of income in Vietnam. These incomes cover income from asset transfers, assignments and liquidations, income from royalties and interest, and compensation for contractual breaches
With VAT
Services or services associated with goods subject to VAT:
– Supply in Vietnam and Consume in Vietnam
– Supply outside Vietnam and Consume in Vietnam.
With CIT
– Services associated with goods;
– Service Provider;
– Supply and distribution of goods;
Notes:
(*) In case, if actual goods are provided with services that are free of charge, whether or not in the contract value of services such as: Installation, warranty, maintenance, running try,…
– For VAT, it must still calculate VAT on the service value.
– For CIT calculated on the entire value of services + goods;
(*) In case the contract cannot separate the value of goods and the value of the accompanying services (including the case of free accompanying services), then:
– For VAT, it must still calculate VAT on the entire contract value.;
– For corporate income tax, it must still calculate corporate income tax on the entire contract value;
To what transactions is Vietnam’s foreign contractor tax not applicable?
Vietnam’s FCT does not apply to all foreign contractors as there are some non-FCT cases specified in the laws. One such example is pure purchase contracts where a Vietnamese customer signs an agreement with a foreign entity to purchase goods or commodities from a foreign country and then imports them into Vietnam.
In addition, the following cases are also not subject to FCT as prescribed in Article 2 of Circular 103/2014/TT-BTC.
What are the ways to declare foreign contractor tax in Vietnam?
There are three methods available – the direct method, the declaration method (also known as the Vietnam Accounting System (VAS) method), and the hybrid method.
Direct method
The most common and practical method of declaring foreign contractor tax (FCT) is the direct method, also known as the withholding method. With this method, the Vietnamese party is responsible for declaring and paying the FCT to the local tax department. The Vietnamese party must first register the contracts with the tax authority and withhold the applicable FCT before making payment to the foreign contractor.
Meanwhile, the declaration method works differently. The taxable revenue in this method depends on the nature of the overseas payment, whether the payment includes tax (net) or not (gross).
Calculated according to NET price
When a foreign business or contractor enters into a contract with a company in Vietnam, they call the total value of that contract before tax, the net contractor tax. To calculate corporate tax at the actual price, we will first calculate CIT, then VAT.
– Corporate income tax:
Revenue subject to CIT = Revenue excluding CIT : (1 – Ratio of CIT calculated on taxable turnover)
CIT = Taxable turnover x CIT rate on taxable revenue
– VAT tax:
Revenue subject to VAT = Revenue exclusive of VAT : (1 – Percentage for calculating VAT on turnover)
VAT payable = Revenue for calculating VAT : Percentage for calculating VAT on sales
Tax payable by contractors = VAT + CIT
Calculated according to GROSS price
When a foreign business or contractor enters into a contract with a company in Vietnam, they call the total value of that contract, including tax, gross contractor tax. To calculate contractor tax at Gross price, we first calculate Value Added Tax, then calculate CIT.
Contractor tax payable = VAT payable + CIT payable
VAT = Contract value x Percentage for calculating VAT on sales
CIT = (Contract value – VAT) x CIT rate
Important notes when calculating contractor tax
– Before deducting taxes they owe, the contractor expect to receive a taxable income amount. Income includes expenses that Vietnamese companies have to pay on behalf of foreign companies, such as accommodation costs for entrepreneurs.
– Using the net calculation method, corporate clients in Vietnam pay foreign companies (excluding Vietnamese amounts). The tax authorities then convert this sum to Vietnamese currency to assess taxable income tax.
– If a foreign contractor hires a sub-organization, the tax authorities deduct sub-organization’s income from the international enterprise’s total. This is for work assigned to the sub-organization. However, contractors/providing services or goods won’t have their taxable income excluded if fulfilling contract terms.
– When calculating VAT and CIT, each different percentage will correspond to each business activity of that company.
– When calculating tax, a foreign organization with many business activities must separate each type. Each corresponds to a particular activity. The case of applying the highest tax rate will be for non-separated businesses.
– International companies are subject to separate tax for each supply activity, even if they provide equipment, training, guidance, and test services. If not separated, the business will be taxed 2% of the total income.
– If the manufacturer is responsible for guaranteeing the import of goods to foreign contractors, they will not be liable for contractor tax related to the use of unsecured services.
Conclusion
In conclusion, navigating the Foreign Contractor Tax in Vietnam can be a daunting task, but with the right information and guidance, it is possible to comply with the regulations and avoid any legal issues. This comprehensive manual serves as a useful guide for individuals and businesses, outlining the various methods for declaring FCT, providing key information on rates and exemptions, and highlighting common mistakes to avoid. By following this guide, taxpayers can ensure that they meet their obligations under the law while optimizing their tax position and minimizing the risk of penalties and fines.
HMLF is always available to offer assistance in understanding the procedures with authorities.
Harley Miller Law Firm “HMLF”
Head office: 14th floor, HM Town building, 412 Nguyen Thi Minh Khai, Ward 05, District 3, Ho Chi Minh City.
Phone number: +84 937215585
Website: hmlf.vn Email: miller@hmlf.vn
