By ADK Vietnam Lawyers
Recently, ADK Vietnam Lawyers Law Firm has advised in legal perspective for the number of construction investment projects has been performed under the form of Engineering – Procurement – Construction contract, referred to as the “EPC Contract” in a synchronous and complete manner.
Under the regulation of Vietnamese laws, in case the contractor performs EPC Contract as a foreign contractor (“Contractor”), there will be tax liability for doing business or earning income in Vietnam when signing a contract with a Vietnamese partner. Within the scope of this article, we will provide a legal summary on tax implications of the Contractor during performing the EPC Contract in accordance with the laws of Vietnam.
1. Corporate income tax (“CIT”) in Vietnam and permanent establishment (“PE”)
Under the current CIT regulations, a foreign company having a PE in Vietnam is liable to Vietnam CIT. Pursuant to Article 2.1 (d) of Consolidated CIT Circular No. 11/VBHN-BTC of the Ministry of Finance dated 15 May 2017, a PE is defined as “a business establishment through which a foreign enterprise conducts part or all of its business or production activities in Vietnam”. Examples of a PE include, amongst others:
Construction sites, construction, installation and assembly works; and
Establishment providing services via its employees or other persons.
Besides, it is also noted that, by laws of Vietnam, if an agreement on double taxation avoidance and prevention of tax evasion with respect to taxes on income and property between Vietnam and other State or territories and in force in Vietnam (“DTA”) has different PE rules from the above domestic PE’s, the DTA would prevail.
2. Value added tax (“VAT”)
The scope of Vietnam VAT covers goods and services used for production, business and consumption in Vietnam, including goods and services provided by foreign suppliers. As such, the goods and services supplied by the Contractor to the EPC project and the project owner fall under this VAT scope.
3. Foreign contractor withholding tax (“FCWT”) – a collection mechanism of CIT and VAT from foreign contractors
FCWT is not a separate tax, but a mechanism to collect CIT and VAT from foreign companies undertaking business activities or earning income in Vietnam without setting up a legal entity in Vietnam like the Contractor’s business performance under the EPC Contract.
Circular 103/2014/TT-BTC exempts FCWT in case of: (i) pure supply of goods where all the risks, liabilities and costs of goods are transferred to the Vietnamese customers at a point overseas or at the Vietnam border-gate; (ii) services performed and consumed outside Vietnam; and (iii) certain services performed wholly outside Vietnam (e.g. certain repairs, training, advertising, etc.).
A CIT-FCWT exemption can be made available under an applicable DTA if the Contractor is able to prove it does not have any PE in Vietnam, or no profits are attributable to a PE.
With regard to the VAT element, the VAT-FCWT shall be applicable if services or services attached to goods subject to VAT that are provided by the Contractor under the contract and used for manufacturing, sale, and consumption in Vietnam are subject to the VAT. The construction and installation services provided by the Contractor to the EPC project and the project owner according to the EPC Contract are not in the list of non-VAT-subjects, so basically the Contractor shall pay the VAT-FCWT.
4. FCWT calculation methods
There are three methods for declaring and paying FCWT.
4.1 Direct method
This is the default method, under which deemed VAT and CIT rates apply on the gross revenue of the Contractors.
The deemed CIT and VAT rates for various activities relevant to the EPC Contract are as follows:
Notes*: The VAT element is exempt for imported goods for which import VAT has been paid. The value of the imported goods should be supported by contract, invoice and customs documents.
Where Contractors conduct various activities and the scope and value of each activity can be identified separately in the contract and invoices, the respective CIT and VAT rates will be applied. If the value of each activity cannot be separated, the highest CIT and VAT rate will be applied to the whole contract value.
The taxable revenue is the total gross contract value (i.e. inclusive of taxes). If the contract value is net of taxes (i.e. the Contractors do not bear Vietnam taxes), the net value must be grossed up to determine taxable revenue. Any local expenses of Contractors incurred and paid by the Vietnamese customer (e.g. accommodation, cars, travel) must be included in the taxable revenue.
Where a main Contractor subcontracts parts of its work agreed in the main contract to Vietnamese subcontractor or foreign subcontractor, and adopt a Declaration method or Hybrid method (we mention the Declaration method and Hybrid method below), the taxable revenue of the main Contractor can exclude the subcontracted values. In order for such deduction to be allowed, a list of the sub-contractors specifying the nature and value of the respective subcontracted work must be provided in the main contract. It is essential that the subcontracted work is identical to the work scope of the main Contractor.
Circular 103/2014/TT-BTC further provides that this deduction shall not apply to: (i) Purchase of materials, machinery and equipment to carry out the main contract; (ii) Purchase of goods and services to perform any work that is not defined in the main contract; and (iii) Purchase of goods and services for internal consumption of the main Contractor.
The Contractors adopting the Direct method are not required to register for Vietnam tax, adopt Vietnam Accounting System (“VAS”), issue tax invoices and charge output VAT. Therefore, the Contractors will not be able to recover the input VAT charged by local sub-contractors and local suppliers.
The FCWT filing and payment responsibilities rest with the Vietnamese customer. If the Contractor opts to adopt the Direct method, it is not required to comply with the Vietnamese accounting regulations, nor file and pay VAT/CIT in Vietnam. The project owner is responsible for withholding FCWT from payments to the Contractor, declaring and paying the FCWT to the tax authority on behalf of the EPC Contractor.
FCWT is due upon actual payments from Vietnamese customers to Contractors.
4.2 Declaration method
The CIT and VAT calculation, declaration and payment mechanisms under this method are similar to those applicable to a domestically registered company.
Under Circular 103/2014/TT-BTC, a Contractor must satisfy all of the following conditions in order to adopt the Declaration method: (i) Having a PE in Vietnam; (ii) The period of conducting business in Vietnam pursuant to the contractor’s or subcontractor’s contract is 183 days or more as from the effective date of such contract; and (iii) Adopting the VAS and registering the method with the tax authority.
If a Contractor adopts this method, it has to register for tax, issue Vietnamese VAT invoices to its Vietnamese customers, and file VAT declarations (VAT payable equals output VAT less input VAT) with the Vietnamese tax authority. Input VAT incurred in Vietnam is recoverable but subject to certain conditions (e.g. sufficient invoices and contracts, evidence for payments, bank transfer).
The Contractor is also required to calculate, and file CIT returns based on the actual profit and loss (“P/L”) of the contract. A tax deduction for expenses (such as payments to its local suppliers and sub-contractors) are allowed provided the general deduction criteria is satisfied (expenses are in relation to the business, expenses are supported by valid documents and expenses are not included in the list of non-deductible expenses). Tax deductibility of expenses relies heavily on documentation such as contracts and invoices.
Adopting this method would require the Contractor to establish a project office, register for a project office seal and tax code, maintain a full set of accounts under VAS, and obtain sufficient documents to support the taxable revenue and expenses as well as engage personnel to fulfil these requirements.
4.3 Hybrid method
This method is a combination of the Direct and Declaration methods above. Contractors adopting the Hybrid method will file VAT returns (similar to the Declaration method) while CIT is calculated at the deemed rate (similar to the Direct method).
To adopt the Hybrid method, Contractors must satisfy conditions (i) and (ii) for the Declaration method as mentioned in Section 4.2 above. For applying VAS, Contractors may not need to adopt full VAS since Circular 200/2014/TT-BTC provides Contractors flexibility to adopt VAS only to the extent their operations and tax compliance require.
The Hybrid method allows Contractors to recover local input VAT. CIT is paid at the deemed rate on gross revenue (after deducting the qualified subcontracted works), thus the administrative work associated with the filing of a CIT return on actual P/L will be reduced.
Under the Hybrid method, Contractors also need to establish a project office, register for a project office seal and tax code, and issue VAT invoices to the Vietnamese customers.
Contractors are required to declare VAT on a quarterly basis, no later than the 30th date of the following quarter.
The CIT return is, by default, filed on a receipt basis, and due within 10 days of the receipt date (as under the Direct method). Monthly CIT filing is possible if there are many payments in a month and the Contractor notify the tax authority that it wishes to carry out monthly CIT filings – the deadline for monthly is within 20 days of the following month.
5. Import duty on imported machinery and equipment
Goods imported to Vietnam are subject to import duty (“ID”). For certain incentivized projects, an ID exemption may be available for machinery and equipment imported to form fixed assets of the project.
With assumption that the project owner is the importer, the exemption is granted to the project owner and not the Contractor. The project owner must register the list of goods entitled to ID exemption with the local Customs authorities, before the goods are imported.
For the purpose of claiming ID exemption, the importer of record for the equipment is the project owner, therefore ID should not be an issue or cost to Contractors.
With regard to the equipment or machinery which are temporarily imported by Contractors to execute the contracts and will subsequently be re-exported upon completion of the contracts, the Contractors must pay ID upon import and then claim a refund upon re-export, based on the residual value of the equipment.
6. Import VAT
10% VAT will be levied on the importation of equipment supplied to the project owner. Since the project owner is responsible for importing the equipment and can generally claim the import VAT as a credit, the 10% import VAT should not be a cost to the project owner or the Contractor.
The VAT implications in relation to the Contractor’ own equipment is similar to the ID’s discussed above.
7. Personal income tax (“PIT”) implications for foreign employees working for the EPC Contract in Vietnam
Individuals coming to Vietnam to work for the EPC Contract are required to declare and pay PIT based on their Vietnam tax residency status, regardless of where the income is paid/received.
An individual is treated as a Vietnam tax resident if: (i) He/she expects to stay/stayed in Vietnam for more than 183 days; (ii) Have a registered residence; or (iii) Have a rented house for residence with a term of 90 days or more. Rented house includes where the individuals stay at hotels, guest-houses, office, etc.
Where an individual stays in Vietnam less than 183 days in a tax year, the individual will be treated as a non-tax resident if he/she can prove tax residency status of another country.
The first tax year is defined as the first 12 month-period starting from the date of arrival; subsequently, it is the calendar year.
An individual is treated as a non-tax resident if he does not meet the conditions stipulated above.
8. Business license tax
Organizations doing business in Vietnam, including FCs, must pay business license tax. The business license tax applicable to FCs is currently VND01 million/year (approximately USD50), payable on an annually basis.