Official Dispatch No. 1108/TCT-DTNN of March 29, 2006, guiding the implementation of Circular No. 05/2005/TT-BTC
THE FINANCE MINISTRY
THE GENERAL DEPARTMENT OF TAXATION
SOCIALIST REPUBLIC OF VIET NAM
Independence - Freedom – Happiness
Hanoi, March 29, 2006
GUIDING THE IMPLEMENTATION OF CIRCULAR No. 05/2005/TT-BTC
To: Provincial/municipal Tax Departments
In the course of implementation of the Finance Ministry’s Circular No. 05/2005/TT-BTC of January 11, 2005, guiding the tax regime applicable to foreign organizations without Vietnamese legal person status and foreign individuals doing business or earning incomes in Vietnam, several problems have arisen. For uniform application, after reporting to the Finance Ministry, the General Department of Taxation hereby specifically guides a number of points of Circular No. 05/2005/TT-BTC as follows:
1. Regarding subjects of application:
1.1. Under Point 2, Section 1, Part A of Circular No. 05/2005/TT-BTC, foreign organizations and individuals that do business in Vietnam but are not present therein, and earn incomes in Vietnam shall have to pay taxes in Vietnam. Services provided by foreign organizations or individuals that are not present in Vietnam shall be taxed in Vietnam when such services are used in Vietnam and paid from sources inside Vietnam.
Thus, foreign organizations or individuals that earn incomes from services provided and used outside Vietnam shall not have to pay tax thereon in Vietnam.
>> See also: DECREE No.107/2009/ND-CP ON TRADING OF LIQUEFIED PETROLEUM GAS THE GOVERNMENT
Example: Company H of Hong Kong provided the cargo handling service at Hong Kong port for the international transportation fleet of Company A of Vietnam. Company A paid a charge for such service to Company H.
In this case, the cargo-handling service at Hong Kong port is a service provided and used in Hong Kong. So company H shall not have to pay tax in Vietnam under the guidance in Circular No. 05/2005/TT-BTC.
1.2. Foreign individuals who are not present in Vietnam but earn incomes in Vietnam, such as royalties, incomes from technology transfer and services provided and used in Vietnam, shall have to pay tax thereon under the provisions of Circular No. 05/2005/TT-BTC.
Foreign individuals who are present in Vietnam but have no permit for independent professional practice shall declare and pay personal income tax under the provisions of the Ordinance on Income Tax on High-Income Earners and guiding documents.
2. Regarding bases and methods of tax determination
Taxable turnover and payable tax amounts in several cases shall be determined as follows:
2.1. Where the whole or part of the contractual value is not liable to value added tax (VAT), the VAT amount shall be calculated on the remaining part (if any) and the business income tax shall be calculated on the whole contractual value.
Example: Contractor F (French), who does not apply the Vietnamese accounting regime, supplied machinery and equipment to enterprise A at the project’s site. The total contractual value was USD 1,000,000, of which the value of machinery and equipment which cannot be yet manufactured in Vietnam for forming enterprise A’s fixed assets was USD 600,000.
Contractor F’s tax obligation shall be determined as follows:
- VAT: USD 400,000 x 10 % x 10 % = USD 4,000
>> See also: How to establish a foreign-invested company in Vietnam?
- Business income tax (BIT): USD 1,000,000 x 1 % = USD 10,000
2.2. For contracts of supply of machinery and equipment accompanied with installation instruction, training and trial operation services, if the value of machinery and equipment and that of services can be separated, then taxes shall be calculated at separate tax rates applicable to the value of each contract component. If the value of machinery and equipment and that of services cannot be separated, then the relevant VAT rate shall apply to 25% the taxable turnover and the BIT rate of 2% (for other production and business activities) shall apply to the whole contractual value.
Example: Contractor H of the Republic of Korea, who does not apply the Vietnamese accounting regime, performed a USD 10,000,000 contract of supply of machinery and equipment accompanied with installation and trial operation services for enterprise B in Vietnam.
Contractor H’s tax obligation shall be determined as follows:
- VAT: USD 10,000,000 x 10 % x 25 % = USD 250,000
- BIT: USD 10,000,000 x 2 % = USD 200,000
2.3. Where a foreign contractor who does not apply the Vietnamese accounting regime subcontracts part of the work stated in the contract signed with the Vietnamese party to a Vietnamese subcontractor, the foreign contractor’s VAT- and BIT-liable turnover shall not cover the value of the work performed by the Vietnamese subcontractor.
If such a subcontractor is a foreign organization or individual, the taxable turnover shall be the whole turnover received by the foreign contractor under the contract signed with the Vietnamese party. The foreign principal contractor shall not have to pay tax on the value of the work subcontracted to the foreign subcontractor if he/she can present documents proving that the foreign subcontractor has registered to directly pay taxes to the tax authority on the value of the subcontract performed by the foreign subcontractor.
2.4. Interests: Under the provision of Item d, Point 2.1, Section II, Part B of Circular No. 05/2005/TT-BTC: "In case of signing a new loan contract which, however, provides for a loan in replacement of the old loan with the same lender and more favorable interest rate and payment conditions compared to the old loan contract, interest thereon shall not be liable to BIT.”
This provision shall apply to Vietnamese enterprises signing contracts for foreign loans before 1999. After 1999, if the interest rate and payment conditions of these contracts were changed to become more favorable than they were before 1999, with the same lenders, loan duration and other contractual terms, then interests arising from these contracts shall not be liable to BIT.
>> See also: Register exclusive trademark of services of sales of goods, advertisement, business management, transaction management, office operation
Example: In 1998, company V in Vietnam signed with company S of Singapore a loan contract with a term of 10 years at an interest rate of Sibor + 0.5%. In 2005, the two companies agreed to reduce the interest rate to Sibor + 0,25 % while keeping the loan duration and other contractual terms unchanged. So, interests arising from the contract from the time of adjustment of the interest rate to the end of the contractual term ( 2008) shall not be liable to BIT.
2.5. Investors that import supplies and goods and assign them to foreign contractors or subcontractors (including cases where foreign contractors perform turnkey contracts or provide supplies for the projects) shall have to pay VAT on such imported supplies and materials according to tax notices of the customs authorities. The paid VAT amounts shall be regarded as the investors’ input VAT and be credited against the input VAT on fixed assets as guided in the Finance Ministry’s Circular No. 120/2003/TT-BTC.
3. Regarding registration declaration for tax payment.
3.1. Under the provision of Point 3, Section I, Part B of Circular No. 05/2005/TT-BTC, for foreign contractors or subcontractors that have permanent establishments in Vietnam, keep invoices and documents and fully reflect on accounting books turnover from goods and services sold; the value of goods and services bought, output VAT; creditable input VAT and payable VAT, as from February 16, 2005 (the effective date of Circular No. 05/2005/TT-BTC), they shall register with the Tax Authorities to pay VAT by credit method and to pay BIT at a turnover-based rate as guided at Point 2, Section II, Part B of Circular No. 05/2005/TT-BTC. In case contractors or subcontractors have registered and paid taxes in accordance with this provision, if they sign other contracts, then they shall continue registering and paying VAT and BIT by this method.
For contracts signed before February 16, 2002, foreign contractors or subcontractors shall continue tax declaration and payment by the method they have registered and applied under the provisions of the Finance Ministry’s Circular No. 169/1998/TT-BTC of December 12, 1998, till the termination of the contracts.
Foreign contractors and subcontractors shall have to separately account VAT and BIT of each contract.
Example: in 2000, foreign contractor H signed the first contract with a seven-year term with enterprise X and registered to pay VAT by the method of direct calculation based on added value and pay BIT at a turnover-based rate. In 2006, contractor H signed the second contract with enterprise Y and registered to pay VAT by the credit method and pay BIT at a turnover-based rate.
So, for the first contract, contractor H must continue paying VAT by the method of direct calculation based on added value and paying BIT at a turnover-based rate. For the second contract and subsequent contracts (if any), contractor H must declare and pay VAT by the credit method and pay BIT at a turnover-based rate.
3.2. For foreign principal contractors paying VAT by the credit method and paying BIT by the turnover-based method:
Foreign principal contractors shall have to register, declare and pay taxes directly at the tax offices of the localities where the contractors are headquartered. They shall declare and pay VAT under the guidance in Part C of the Finance Ministry’s Circular No. 120/2003/TT-BTC of December 12, 2003, and pay BIT under the guidance at Point 2, Section II, Part C of the Finance Ministry’s Circular No.05/2005/TT-BTC of January 11, 2005. The finalization of VAT and BIT by foreign principal contractors shall be effected according to the calendar year.
>> See also: How to establish a branch of a foreign company in Vietnam?
In case a foreign principal contractor signs a subcontract whereby he/she assigns part of the work to a subcontractor who does not apply the Vietnamese accounting regime, the foreign principal contractor shall have to declare, withhold and pay taxes on behalf of the foreign subcontractor into the state budget.
4. Regarding extension of contracts:
For contracts which terminated before February 16, 2005 (the effective date of Circular No.05/2005/TT-BTC) and were extended as agreed upon between the contractual parties before that date, tax declaration and payment shall comply with the guidance in Circular No. 169/1998/TT-BTC of December 22, 1998, and Circular No. 95/1999/TT-BTC of August 6, 1999.
For contracts which terminated after February 16, 2005, and were extended as agreed upon between the contractual parties (including cases where such extension was effected before that date), tax declaration and payment shall comply with the guidance in Circular No. 05/2005/TT-BTC as from the date of expiration of the first contract.
5. Regarding remuneration:
5.1. Under the provision of Point 2, Section IV, Part E of Circular No. 05/2005/TT-BTC, "For BIT amounts of foreign contractors or subcontractors withheld and paid into the state treasuries by the Vietnamese parties, the Vietnamese parties shall enjoy a remuneration equal to 0.8% of the withheld BIT amounts, which shall, however, not exceed VND 50 million per tax withholding and payment.”
As such, from the effective date of Circular No. 05/2005/TT-BTC, the remuneration policy applicable to Vietnamese parties to contracts signed before and after February 16, 2005, shall be implemented under the aforesaid guidance.
5.2 When making tax declaration or finalization, the Vietnamese parties shall declare the remuneration amount they are entitled to withhold on tax payment declaration or tax finalization declaration form No. 02-NTNN and No. 04-NTNN enclosed herewith.
Provincial/municipal Tax Departments are hereby requested to base themselves on Circular No.05/2005/TT-BTC and this Official Letter to organize the guidance and inspection of the tax declaration and payment by contractors to ensure proper tax management of foreign contractors. Any problems arising in the course of implementation should be reported to the General Department of Taxation for timely guidance./.
>> See also: Register a trademark protection for pharmaceutical products and dietary supplements in Vietnam?
FOR THE GENERAL DIRECTOR OF TAXATION
DEPUTY GENERAL DIRECTOR
Pham Van Huyen
>> See also: Register a trademark for vehicles and parts of vehicles in Vietnam?