E-commerce has bloomed in Vietnam. Covid, the internet, and the smartphone have all been accelerators. Service providers and suppliers have expanded outbound sales and they now can access customers around the world. Consumers easily purchase goods and services from offshore providers (eg, Amazon, Alibaba, eBay, Netflix, Apple, Agoda, Booking, Facebook, TikTok, Traveloka, Expedia, etc.). In parallel with promotion of the digital economy, Vietnam wants to increase revenues which arise from digital commerce and cross-border e-transactions. This Article discusses applicable taxes, withholding obligations, requirements on tax filling, and procedures for offshore service providers/suppliers to register and to pay Vietnamese taxes imposed on cross-border e-transactions under the existing tax regime (Circular 103[1]) and under the new Law on Tax Administration (“LTA”)[2]. It also points out the difficulties of doing so.
General tax liability. Subject to the nature of a transaction, the following Vietnamese taxes may be imposed on a cross-border e-transaction: (i) foreign contractor tax (“FCT”); (ii) import duties and excise tax. Import duties and excise taxes are rare. The FCT applies only when the offshore supplier sells goods that are subject to import duties and/or excise tax (eg, cigarettes, spirits, air-conditioners, etc.), but the FCT is a typical tax in most transactions, and for the purpose of this Article, we focus only on the FCT that may arise from a cross-border e-transaction.
Typically, an FCT obligation arises in: (i) a cross-border e-transactions in which a Vietnamese customer (whether an entity or an individual) purchases goods from an offshore supplier through web-based platforms or mobile applications (eg, from Amazon, Alibaba, eBay, etc.); or through digital platforms (eg, Sellfi, Shopify, FastSpring, etc.); and (ii) a cross-border e-transaction in which a Vietnamese customer purchases services from an offshore service provider (eg, hotel booking, iCloud storage services, data processing, digital information services, online training courses, recruitment services, etc.).
The FCT is a type of withholding tax that is comprised of two components: Value Added Tax (“VAT”) and income tax. For an entity, the FCT is comprised of Corporate Income Tax (“CIT”) and VAT. VAT and Personal Income Tax (“PIT”) apply to an individual offshore supplier/service provider.
FCT liability. Under Circular 103, an offshore supplier/service provider that does business in Vietnam, or receives income from Vietnam, on the basis of an agreement between an offshore supplier/service provider and a Vietnamese counterparty, is subject to the FCT. The Vietnamese counterparty may include: (i) individuals (eg, in business to customers (“B2C”) transactions), or (ii) state, domestic companies or foreign-owned enterprises that are incorporated or registered to do business in Vietnam (eg, in business-to-business (“B2B”) transactions).
FCT exemption. The FCT does not apply to an offshore supplier/service provider that sells its goods to or provides services in one of the following circumstances:
- Goods delivered at a foreign border gate: The seller is responsible for all liabilities, cost and risks in relation to goods exported to Vietnam and delivered at the foreign border gate; the buyer is responsible for all liabilities, costs and risks in relation to the receipt of goods and transportation of goods from the foreign border gate to Vietnam (even when the seller is responsible for the warranty);
- Goods delivered at Vietnam’s border gates: The seller is responsible for all liabilities, cost and risks in relation to the goods until the goods are delivered at Vietnam’s border gate; the buyer is responsible for all liabilities, costs and risks in relation to the receipt of goods and transportation of goods from Vietnam’s border gate (even when the seller is responsible for the warranty);
- Services provided and consumed outside of Vietnam: Income derived from services that are provided and consumed outside of Vietnam are not taxed in Vietnam;
- Provision of services abroad: A foreign service provider is not subject to the FCT if its services are provided abroad and if it provides the following services: (i) repair of transportation means (aircraft, aircraft engine, aircraft and ship parts), machinery and equipment (including undersea cables and transmission devices), with or without spare parts; (ii) marketing and advertisement services (other than marketing and advertisement through the Internet); (iii) investment and trade promotion; (iv) brokerage for offshore sale of goods or provision of services; (v) training (other than training through the Internet); and (iv) international post and telecommunications that are provided from abroad.
VAT exemption. Subject to the nature of a transaction, VAT may be exempt. For example, (i) postal and telecommunications services provided from abroad (inbound services); (ii) newspapers, magazines, specialist newsletters, political books, textbooks, teaching materials, law books, scientific books; (iii) education and training services; (iv) technology transfer, transfer of intellectual properties (including transfer of trademarks or software); (v) life insurance, health insurance; (vi) health care services, are exempt from VAT pursuant to Circular 219[3]. Offshore suppliers/services providers of such products/services (eg, e-magazines, e-books, Office 365, computer programs, online training courses, etc.), are eligible for VAT exemption.
CIT exemption. Vietnam has signed several tax treaties with about 80 countries. An offshore service provider/supplier should explore tax benefits under these tax treaties (eg, seek an CIT exemption or CIT reduction). Of course, certain conditions must be met and supporting documents must be provided. To enjoy CIT exemption, an offshore service provider/supplier must not have a permanent establishment (“PE”) in Vietnam. The concept of “PE” varies in each tax treaty, and it depends on the factual situation. For example, a Singaporean entity is deemed to have a PE in Vietnam if (i) it has an agent in Vietnam and this agent has authority to sign contracts habitually (on behalf of the Singaporean entity); OR the period(s) of the service contract between the Singaporean service provider and its Vietnamese counterparty exceeds 183 days within any 12 consecutive months.
A qualified offshore supplier/service provider can apply for CIT exemption under relevant tax treaties. Among other documents, the qualified offshore supplier/service provider is required to provide a copy of: (i) certificate of residency issued by the tax authorities of its home country, certifying that the offshore supplier/service provider is a tax resident of its home country in a relevant fiscal year; (ii) a contract between the offshore supplier/service provider and its Vietnamese counterparty; and (iii) an application form (Form 01/HTQT in Circular 80[4]).
Withholding obligations under FCT regime. There are three methods to compute FCT: (i) Declaration Method[5]; (ii) “Hybrid” Method[6]; and (iii) Direct Method[7]. In case of applying the Direct Method, the Vietnamese counterparty is responsible to withhold and pay FCT on behalf of the offshore supplier/service provider. In practice, the current FCT regime (Circular 103) can “catch” only registered business entities (being a Vietnamese counterparty to cross-border e-transactions) to withhold FCT from the offshore suppliers/service providers. It is infeasible for Vietnamese individual buyers to compute and withhold the FCT from the offshore suppliers/service providers. The LTA has addressed this matter. Briefly, the LTA and its implementing regulations (i) require offshore suppliers/services providers to register Vietnam tax ID and pay Vietnamese taxes, and (ii) require commercial banks and intermediate payment service providers to withhold the FCT if these offshore suppliers/service providers fail to comply with the LTA (ie, failure to register Vietnam tax ID and pay Vietnamese taxes).
Withholding obligations under the LTA. The new LTA and Decree 126[8] have introduced new rules whereby (i) offshore suppliers and service providers which have no PE in Vietnam, and which sell goods or provide services in Vietnam under cross-border e-transactions, or through digital-based platforms, must register tax information with the General Department of Taxation of Vietnam (“GDT”) and pay Vietnamese taxes imposed on their Vietnam-sourced income; (ii) commercial banks and intermediate payment service providers must withhold and pay Vietnamese taxes imposed on each goods, products or services purchased by Vietnamese individual buyers under cross-border e-transactions or through digital platforms, if these offshore service providers/suppliers fail to register tax information (ie, obtain a Vietnam tax ID) and fail to pay Vietnamese taxes[9].
Offshore suppliers and service providers can obtain a Vietnam tax ID and register tax information with the GDT via the e-filling system. Based on the list of offshore service providers/suppliers that have registered tax information with the GDT (“GDT’s List”), commercial banks and intermediate payment service providers must fulfil their withholding obligations only when offshore service providers/suppliers are not included in the GDT’s List. In reality, very few entities are on GDT’s List. This is also challenging for commercial banks and intermediate payment service providers since tax matters are complicated, and offshore suppliers may provide various tangible and intangible goods which are taxed at different tax rates.
Tax registration under FCT regime. Subject to the method of tax payment, an offshore supplier/service provider may be responsible to pay and declare the FCT by itself or through its Vietnamese counterparty. For instance, an offshore supplier/service provider that opts to apply the Declaration Method or the Hybrid Method must register and pay FCT directly to the tax authorities. In case of applying the Direct Method, the Vietnamese counterparty is responsible to register with the tax authorities and to withhold and pay FCT on behalf of the offshore supplier/service provider.
Tax registration under the Law on Tax Administration. Under the LTA, offshore suppliers and service providers which have no PE in Vietnam, and which sell goods or provide services in Vietnam under cross-border e-transactions, or through digital based platforms, are required to register and pay Vietnamese taxes and to file Vietnamese tax returns in accordance with regulations and guidance of the Ministry of Finance (“MOF”)[10]. To date, the MOF has created a portal where offshore suppliers/service providers can register their Vietnam tax ID and pay taxes online. For the purpose of registering Vietnam tax ID, an offshore service provider/supplier is required to provide a copy of: (i) certificate of incorporation (or equivalent documents); (ii) certificate of tax ID (or equivalent documents) issued in its home country. These documents must be translated into English or Vietnamese.
In practice, several offshore suppliers/service providers have not complied with the LTA. To cover losses of tax revenues, the GDT has passed a burden of tax collection on: (i) commercial banks and intermediate payment service providers (in B2C transactions); and (ii) Vietnamese counterparties that are entities (in B2B transactions) to withhold Vietnamese taxes from the offshore breaching suppliers/providers.
Tax filing and reporting requirements under FCT regime. Under the Direct Method, within 10 days from the date of each payment made to an offshore supplier/service provider, the Vietnamese counterparty must pay FCT and file tax returns with the local tax authorities. In case the Vietnamese counterparty makes multiple payments within a month to the offshore supplier/service provider, the Vietnamese counterparty can choose to file tax returns on a monthly basis with local tax authorities. Under the Declaration Method and the Hybrid Method, the offshore supplier/service provider must file monthly tax returns (for VAT) and quarterly tax returns (for CIT).
Tax filing and reporting requirements under the LTA. Under Circular 80[11], offshore service providers/suppliers which have no PE in Vietnam, and which sell goods or provide services in Vietnam under cross-border e-transactions, or through digital based platforms, are required to file quarterly tax returns. Tax returns (Form 02 under Circular 80) can be filled with the GDT’s Portal via e-filling. Offshore service providers/suppliers are liable to pay FCT under the Director Method under which VAT rate ranges from 1% to 5%, and CIT rate ranges from 0.1% to 10%.
Commercial banks and intermediate payment service providers which are responsible to withhold Vietnamese taxes, are required to file monthly tax returns (Form 03 under Circular 80).
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Up to November 2022, only 40 offshore service providers/suppliers have registered their Vietnam tax ID and pay Vietnamese taxes as required in the LTA, Decree 126 and Circular 80. A few large corporations appear on GDT’s List such as Microsoft, Netflix, TikTok, Samsung, LinkedIn. Even so, it was reported that in 2022 the GDT collected about 3,500 billion Vietnamese dong (approximately US$150 million) from these offshore suppliers/service providers. Many other offshore service providers/suppliers have not complied with the LTA, Decree 126 and Circular 80. Consequently, these breaching taxpayers may be subject to tax penalty[12] and administrative fines for late payment and late filling. Offshore suppliers/service providers should review their existing practices and operations involving Vietnam in order to have appropriate tax planning and tax compliance.
Risks to commercial banks. The LTA and Decree 126 impose a mandatory obligation on commercial banks and intermediate payment service providers to withhold and pay Vietnamese taxes imposed on each product or service purchased by Vietnamese individual buyers under cross-border e-transactions or through digital platforms, if the offshore service providers/suppliers are not included in the GDT’s List. Commercial banks and intermediate payment service providers should pay more attention to cross-border e-transactions involving Vietnamese individual buyers and offshore service providers/suppliers. Tax computation is complicated. Tax risks and non-compliance issues may exist for commercial banks and intermediate payment service providers. In some situations, commercial banks and intermediate payment service providers–which provide collection service–may be unable to withhold FCT for technical reasons (eg, Vietnamese individual buyers use e-wallets or credit cards issued by other offshore banks or they may pay in digital currencies). In such situations, the LTA and Circular 80 oblige commercial banks and intermediate payment service providers to report these cases to the GDT. To avoid tax exposure, it may be desirable for collection banks to: (i) review the list of clients who are offshore service providers/suppliers, and who are not included in the GDT’s List, and (ii) send a notice to these clients, notifying of their obligations to comply with the LTA, Decree 126 and Circular 80.
Vietnamese counterparty which is an institutional entity–that is a party to cross-border e-transactions involving offshore service provider/supplier–is responsible to withhold and pay FCT on behalf of the offshore supplier/service provider. Tax clauses (including tax gross up clauses, obligations to pay applicable taxes, tax indemnity, etc.) should be considered, addressed and reflected in B2B transactions.
In addition to tax collection from offshore suppliers/service providers, the MOF and the GDT are working with other state authorities and domestic e-commerce platforms in order to shape effective tax regimes and mechanisms enabling tax authorities to collect taxes from Vietnamese entities and individuals which provide goods and services through e-commerce and digital platforms. This is another challenge for the MOF and the GDT since the mode of payment under most domestic e-transactions is “cash on delivery”.
For further information, please contact:
Nguyen Huu Hoai, Partner, Russin & Vecchi
NHHoai@russinvecchi.com.vn
[1] Circular 103/2014/TT-BTC of the Ministry of Finance dated August 6, 2014 (“Circular 103”).
[2] Law no. 38/2019/QH14 adopted by the National Assembly on June 13, 2019 (“LTA”).
[3] Circular 219/2013/TT-BTC of the Ministry of Finance dated December 31, 2013 (“Circular 219”).
[4] Circular 80/2021/TT-BTC of the Ministry of Finance dated September 29, 2021 (“Circular 80”).
[5] The Declaration Method can be applied if all of the following condition can be met: (i) the offshore supplier/service provider adapts the Vietnam accounting system, and it has Vietnam tax ID; (ii) the offshore supplier/service provider has a permanent establishment in Vietnam; (iii) the term of contract between the offshore supplier/service provider and Vietnamese counterparty exceed 183 days. In such case, the offshore supplier/service provider is responsible to file tax returns and pay FCT.
[6] The Hybrid Method can be applied if all of the following conditions can be met: (i) the offshore supplier/service provider has a PE in Vietnam; (ii) the contract has a term of at least 183 days from the effective date of the contract; and (iii) the offshore supplier/service provider maintains accounting records in accordance with the accounting regulations and guidance of the Ministry of Finance of Vietnam. In such case, the offshore supplier/service provider is responsible to file tax returns and pay FCT.
[7] The Direct Method can be applied in one of the following circumstances: (i) the offshore supplier/service provider does not adapt the Vietnam accounting system, and it does not have Vietnam tax ID; (ii) the offshore supplier/service provider has no permanent establishment in Vietnam; (iii) the term of contract between the offshore supplier/service provider and Vietnamese counterparty is less than 183 days.
[8] Decree 126/2020/ND-CP of the Government dated October 19, 2020 (“Decree 126”).
[9] Article 30 of Decree 126.
[10] Article 42 of the LTA.
[11] Circular 80 is an implementing regulation of the LTA.
[12] The tax penalty for late payment is 0.03% per each day, imposing on outstanding tax amounts and computing from the due date to the actual payment date.
