Vietnam's Free Trade Agreements
Free trade agreements (FTAs) are when two or more countries agree on the terms of trade between them. They determine the value of tariffs and duties that countries impose on imports and exports. In 2007, with Vietnam’s ascension into the World Trade Organization (WTO) – it took a significant step integrating with world trade and subsequently entering into several free trade agreements.
Over the past few years, Vietnam has been active in signing bilateral trade agreements with countries throughout the world. Additionally, due to its membership in the Association of Southeast Asian Nations (ASEAN), Vietnam has become a party to several FTAs that the regional trade bloc has signed.
FTAs – The benefits
The benefits of the free trade agreements will enable Vietnam’s economic development to continue to shift away from exporting low-tech manufacturing products and primary goods to more complex high-tech goods like electronics, machinery, vehicles and medical devices.
This can be done in two ways – first, through more diversified sourcing partners through larger trade networks and cheaper imports of intermediate goods from partner countries, which should boost the competitiveness of Vietnam’s exports.
Second – through partnership with foreign firms that can transfer the knowledge and technology needed to make the jump into higher value-added production. An example of this is the VSmart phone manufactured by Vietnamese conglomerate Vingroup.
Vietnam is touted as a low-cost manufacturer with several companies such as Samsung and Nokia setting up shop to manufacture and then export electronics, but the latest example shows how Vietnam can develop its own products from the transfer of know-how technology.
Such sophisticated business practices and technology will help boost Vietnamese labor productivity and expand the country’s export capacity.
With recent trade agreements like the RCEP and the EVFTA – Vietnam seems to prioritize international trade integration trade partners outside ASEAN.
Once in effect, such trade agreements will allow Vietnam to take advantage of the reduced tariffs, both within the ASEAN Economic Community (AEC) and with the EU and US to attract exporting companies to produce in Vietnam and export to partners outside ASEAN.
Vietnam’s entry into these trade deals will also ensure alignment with national standards ranging from employee rights to environmental protection. Both the CPTPP and EVFTA require Vietnam to conform to the International Labor Organization’s (ILO) standards. The ILO has noted that this is an opportunity for Vietnam to modernize its labor laws and industrial relations systems.
Challenges posed by FTAs
The FTAs may also come with some added downsides. Such agreements are likely to trigger aggressive competition from foreign rivals on local businesses – particularly in the agriculture sector including meat and dairy products from the EU, Australia, and Canada.
If local firms do not adapt, make use of new market opportunities and potential partnerships with foreign firms – they could find competing in the market challenging.
The Vietnamese government would also need to continue on its path of reforms – strengthening the banking sector, removing corruption, refining legal and tax structures, and improving trade facilitation.
Vietnam’s Ministry of Planning and Investment forecast that the CPTPP could increase Vietnam’s GDP by 1.3 percentage points by 2035, while the EVFTA could boost GDP by 15 percent. These trade deals along with already signed and upcoming FTAs are likely to ensure that Vietnam remains competitive in the short-to-medium term.
Vietnam's double tax avoidance agreements
With regard to international trade, the various countries’ tax systems often times put global investors in the unfavorable position of having to face redundant taxes on their income —i.e., double taxes. For example, a company may be subject to taxes in its country of residence and also in the countries where it raises income through foreign investments for the provision of goods and services.
It is therefore extremely worthwhile for foreign investors to be aware of the existing double taxation avoidance agreements (DTAAs) between Vietnam and various countries, as well as how these agreements are applied. These treaties effectively eliminate double taxation by identifying exemptions or reducing the amount of taxes payable in Vietnam.
As of 2022, Vietnam has signed DTAs with more than 80 countries and territories, including France, China, and Canada. These treaties eliminate double taxation through identifying exemptions or reducing tax payable in Vietnam for residents of the signatories of the agreements.
Subject of DTAs
DTAs are applied to individuals or corporations who are residents of Vietnam, citizens of DTA countries, or both.
Residents of countries that are signatories to DTAs are taxable subjects in their native countries under the law of that country. They are considered residents if they own residential property, have had periods of residence in the signatory country, or satisfy any other criterion of a similar nature.
Organizations are considered residents of Vietnam if they have established a business in Vietnam and operate under Vietnamese law. Examples include state companies, cooperatives, LLCs, JSCs, or private enterprises.
Principles of application
If there is a direct conflict between domestic tax laws and tax provisions in a DTA, tax provisions of DTA will apply.
However, domestic tax laws will prevail when tax obligations included in the DTA do not exist in Vietnam or when tax rates in the agreement are higher than domestic taxes.
For example, if a signatory country is entitled to impose a type of tax, which Vietnam does not recognize, then Vietnam’s tax law will apply.
Furthermore, the provisions of a DTA will not affect the rights or immunities of members of diplomatic and consular missions, as per international treaties, which Vietnam has signed or to which it has acceded.
Finally, DTAs typically only apply to income tax, while in Vietnam, DTAs impact both corporate and personal income tax.
Who do DTAAs apply to?
DTAAs apply to both individuals and corporations who are residents of Vietnam or of the country that Vietnam had signed a DTAA with or both.
On the other hand, residents of Vietnam must satisfy at least one of the following:
- Having stayed in Vietnam for 183 days or more within one calendar year or a consecutive 12-month period from the first date of arrival;
- Obtained and registered for permanent residence status; or
- Leased a residence in Vietnam for at least 90 days within the tax assessment year. Applicable residences include hotels, boarding houses, rest houses, lodgings, and working offices.
Organizations are considered residents of Vietnam if they have established a business in Vietnam and operate under Vietnamese law. Examples include state companies, cooperatives, limited liability companies (LLCs), joint-stock companies, and private enterprises.
How do DTAAs apply?
If there is a direct conflict between domestic tax laws and the tax provisions in a DTAA, those in the DTAA will prevail. However, domestic tax laws will prevail when the relevant tax obligations included in the DTAA do not exist in Vietnam or when the tax rates in the agreement are more than the domestic tax rates. For example, if a signatory country is entitled to impose a type of tax that Vietnam does not recognize, then Vietnam’s tax laws will apply.
DTAAs typically only apply to income taxes. However, in Vietnam, DTAAs impact both corporate and personal income taxes.
Types of taxable Income
For foreign-invested enterprises (FIEs), corporate income is what is earned from carrying out production and business activities in Vietnam.
The tax obligations of FIEs are determined as follows:
- Legal entities (e.g., wholly foreign-owned enterprises or joint ventures) – such entities are taxed on incomes arising from business activities according to the corporate income tax law. The current standard tax rate in Vietnam for corporate entities is currently 20 percent.
- Non-legal entities – those who operate without forming legal entities will be subject to withholding tax or partially taxed if they own a permanent establishment (PE) in Vietnam to which income can be directly or indirectly attributed.
A PE is defined as a fixed place of business where operations are wholly or partially carried out. An FIE is said to be a PE in Vietnam if it maintains a building, office or equipment (either wholly or in part) that must be set up at a specified place and/or maintained permanently.
Investors with PEs who are licensed to conduct business in Vietnam are subject to the laws of the prevailing corporate income taxes in Vietnam. Those who conduct business under contract with Vietnamese organizations or individuals will be subject to withholding tax according to foreign contractor withholding tax regulations.
Income earned from Vietnam by FIEs
No treaty benefit applies to dividends under DTAAs as there is no withholding tax on dividends in Vietnam. Companies are required to fulfill their financial and tax obligations in Vietnam before remitting dividends to their overseas parent companies. This means that the remitted dividends are after-tax profit which can be taxed again in the other signatory countries. Most tax and revenue jurisdictions allow tax offset for tax paid in other countries on dividends received.
Interest & royalties
Interest & royalties are taxed at 5 percent and 10 percent respectively. Tax on the interest is usually exempt under most DTAA while tax in royalty income is often reduced and ranges from 5 percent to 15 percent.
Technical, management, and consulting services
Tax on service fees is often withheld at 10 percent, in which 5 percent is of value-added tax (VAT) and the other 5 percent portion is CIT. Under DTAAs, only the CIT portion is subject to an exemption.
Residents of countries that have a DTAA with Vietnam that earn income in Vietnam are required to pay income taxes subject to Vietnam’s personal income tax laws. However, these residents may be exempted from taxation if they satisfy all of the following conditions:
- The resident is in Vietnam for fewer than 183 days over a 12-month period of any taxable year;
- The resident’s employer is not a resident of Vietnam, regardless of whether the wages are paid directly by the employer or through the employer’s representative; and
- The wages are not paid by the PE of the employer in Vietnam.
Income raised from the provision of independent services is also subject to corporate income taxes, and foreign individuals that earn income this way must pay the relevant income taxes. If individuals or companies provide independent services without a business license, they are also required to pay personal income taxes.
|Vietnam's Double Taxation Avoidance Agreements (as of 2020)|
|Algeria (Not yet in effect)||Ireland||Portugal|
|Belarus||North Korea||Saudi Arabia|
|Brunei Darussalam||Kuwait (Not yet in effect)||Seychelles|
|China||Macedonia (Not yet in effect)||Spain|
|Egypt (Not yet in effect)||Mozambique||Thailand|
|Germany||Norway||United Arab Emirates|
|Hong Kong||Oman||United Kingdom|
|Hungary||Pakistan||United States (Not yet in effect)|