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Profit Repatriation

In order to repatriate profits, a company must ensure that it has completed the declaration of CIT of the relevant financial year and issued audited financial statements. The company must then report its intention to repatriate its profits to the tax bureau. If, within seven days, there is no notice from the tax bureau, the profits may be remitted out.

Companies can expect it to be between the middle to the end of April before they are able to remit their profits out of the country. However, profit repatriation will not be allowed if the financial statements of the company show an accumulated loss.

Foreign Contractor Tax

Enterprises subject to foreign contractor taxation

Foreign contractor tax, or generally referred to as withholding tax, is imposed on foreign contractors or foreign sub-contractors who are defined as foreign organizations or individuals carrying out business in Vietnam under the contract signed with a Vietnamese contracting party or signed with a main foreign contractor (not under a direct investment form in accordance with the investment law of Vietnam).

Calculation

According to Circular No. 103/2014/TT-BTC, the calculation of CIT and VAT for foreign contractors are different depending on the methods of payment. There are three methods available, which are as follows:

  • Deduction and declaration method: VAT and CIT payments will be filed in the same manner and tax rates as local companies; foreign contractors will be allowed to follow the ordinary method if they satisfy the following conditions:
    • They have a permanent establishment or resident status in Vietnam;
    • Their duration of conducting business in Vietnam under a contractor or sub-contractor contract is 183 days or more from the effective date of the contract; and
    • They apply the Vietnamese accounting system to their business, complete the tax registration and are issued a TIN by a tax authority.
  • Hybrid method: VAT is calculated based on the deduction method, while CIT is determined under the direct method rates on the gross turnover. In order to adopt the hybrid method, foreign contractors and subcontractors must meet the following conditions:
    • They have a permanent establishment or resident status in Vietnam;
    • Their duration of conducting business in Vietnam under a contractor or sub-contractor contract is 183 days or more from the effective date of the contract; and
    • They apply the accounting system according to Vietnamese accounting regulations and guidance of the Ministry of Finance.
  • Direct method: This method is applicable when the foreign contractors do not meet one of the conditions mentioned above; the base for calculating VAT and CIT is the taxable revenue. VAT on goods or services used to execute main contracts and subcontracts must not be deducted.

Rates

VAT

The added value of services or services accompanying VAT-liable goods is the turnover for VAT calculation multiplied by the percentage (%) of the added value to turnover.

Payable VAT amount = Revenue subject to VAT x VAT rate

The added value of services or services accompanying VAT-liable goods is the turnover for VAT calculation multiplied by the percentage (%) of the added value to turnover (see chart below).

Corporate income tax

The CIT amount payable is the turnover for CIT calculation multiplied by the CIT rate (%) based on turnover for CIT calculation.

Custom Duties

Most goods exported or imported across the borders of Vietnam, or which pass between the domestic market and a non-tariff zone are subject to export or import duties.

Calculation

The payable import tax or export tax amount shall be equal to the unit volume of each actually imported or exported goods item inscribed in the customs declarations multiplied by the tax calculation price and the tax rate of each item stated in the tariff at the time of tax calculation. At present, export tariffs are codified under Circular 182/2015/TT-BTC.

Rates

Most goods and services being exported are exempt from tax. Export duties (ranging from zero percent to 40 percent and computed on free-on board (FOB) price) are only charged on a few items, mainly natural resources such as minerals, forest products, and scrap metal.

Consumer goods, especially luxury goods, are subject to high import duties, while machinery, equipment, materials, and supplies needed for production, especially those items which are not produced domestically, enjoy lower rates of import duties, or even a zero percent tax rate. Duty rates for imported goods shall include preferential rates, special preferential rates, and standard rates depending on the origin of the goods.

Payment

Import and export duties declaration are required upon registration of customs declarations with the customs offices.

Export duties must be paid within 30 days of registration of customs declarations. For imported goods, import duties must be paid before receipt of consumer goods, specifically:

  • Within 275 days for imported supplies and raw materials intended for the production of exported goods;
  • Within 15 days for goods temporarily imported and intended for re-export, as from the deadline for temporary import for re-export or temporary export for re-import, as provided for by competent state agencies.
  • Goods imported for export production;
  • Goods temporarily imported or exported for the repair or replacement;
  • Goods used in the production of digital content, IT, or software; and
  • Fertilizers and pesticides that are unavailable in the Vietnamese market.

Transfer Pricing

Many foreign businesses delocalize their production facilities in Vietnam and charge their foreign outposts for administrative, technical, financial, and commercial services. However, financial administration teams need to be aware that their transactions must comply with the arm’s length and substance-over-form principles.

Before the government released “Providing tax administration applicable to enterprises having controlled transactions” (‘Decree 20’) in April 2017, transfer pricing rules in Vietnam were lax. Investors could enter the market without worrying too much about their transfer pricing policies.

Now, companies that are considering an investment into Vietnam, as well as those companies that are already operating in the country, need to comply with the stricter regulatory requirements in Decree 20, which are based on Organization for Economic Cooperation and Development (OECD) and Base Erosion and Profit Shifting (BEPS) guidelines and actions.

Key Compliance in Vietnam

Before Decree 20 was issued, transfer pricing rules in Vietnam incorporated the arm’s length principle as their foundation. Accordingly, Decree 20’s biggest impact is the introduction of the substance-over-form principle: foreign investors should review this when structuring supply chains.

Substance-over-form is a principle by which tax authorities look past the legal forms of transactions and operating structures, and instead consider and analyze their economic substance.

What does it means in practice?

Foreign parent companies that delocalize their production facilities in Vietnam may seek to act solely as a subcontractor, operating through their Vietnamese subsidiary alone. The foreign parent company then seeks to charge its subsidiary on a monthly basis for commercial services performed in regard to developing sales in Vietnam.

According to the substance-over-form principle, those commercial services should contribute to the creation of operating sales revenue or income for the Vietnamese subsidiary. As a consequence, expenses related to commercial services are not deductible from the subsidiary’s taxable income.

Alternatively, if the same Vietnamese subsidiary were engaged in sales activities, then those same commercial service expenses would comply with the substance-over-form principle.

Accordingly, the expenses could then be deducted if the prices charged were at arm’s length (or market rate).

Some companies, however, may seek to engage in more complicated relationships. A multinational enterprise may like to interpose a Vietnamese entity in transactions between two member companies that are residents of countries, which have not signed a double taxation agreement.

According to the substance-over-form principle, associated transactions should have a significant purpose (aside from reduction of tax liability) and an economic effect (aside from any tax effect) in order to be accepted by authorities. In this case, no related expenses would be deductible from the Vietnamese entity’s taxable income.

Finally, from a tax planning perspective, it is worth noting that Decree 20 introduced limitations on the deductibility of loan interest costs, which now should not exceed 20 percent of earnings before interest, taxes, depreciation, and amortization (EBITDA).

This measure is aimed at addressing thin capitalization, as Vietnam lacks specific thin capitalization rules. However, the Ministry of Finance reportedly plans to introduce thin capitalization rules in the near term to limit the deductibility of interest costs if specific debts to equity ratios are breached.

How to comply with transfer pricing regulations

Taxpayers in Vietnam that have entered into related-party transactions have a number of obligations under Decree 20. These have been summarized and set out below:

Forms

Companies in Vietnam that engage in related party transactions need to disclose their relationships and transactions in their annual tax returns.

Taxpayers subject to transfer pricing regulations need to file Form 01 – which is attached to Decree 20 – to disclose what transfer pricing transactions they have entered into, and the value of these contracts. Further, taxpayers need to provide what the arm’s-length prices of the related-party transactions would be to enable a comparison.

The timeframe to do this is 90 days after the end of the financial year. This may prove very challenging given the short amount of time to collect and collate all necessary information and data – careful planning and observance are therefore prudent.

Contemporaneous documentation

Transfer pricing contemporaneous documentation is designed to document taxpayers’ relationships and transactions with related parties, as well as their global transfer pricing policies and the allocation of profits among all members/entities within a corporate group.

Taxpayers meeting specific thresholds must, in accordance with Decree 20, prepare, and then maintain transfer pricing contemporaneous documentation, which encompasses a Local File, and one or more of the Master File and Country-by-Country Report (CbCR).

It is likely that the Master File and CbCR will be prepared by headquarters, as they are likely to have direct access to all necessary information. All those documents must be declared by filing Form 02, 03, and 04, which are all attached to Decree 20.

Safe harbors from contemporaneous documentation

According to Decree 20, enterprises are exempted from preparing the transfer pricing documentation if any of the following conditions are satisfied:

  • Total revenue < VND 50 billion (USD 2.5 million) and total revenue of related-party transactions
  • < VND 30 billion (USD 1.5 million);
  • Entered into an Advanced Pricing Agreement (APA) and submitted annual APA report(s);
  • Exercise only simple functions, sales < VND 200 billion (USD 10 million) and EBIT, depending on business, of at least 5% (distribution), 10% (manufacturing) or 15% (toll manufacturing).
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