Signing a service contract with a foreign company, how to calculate tax?

Pursuant to Circular No. 103/2014/TT-BTC dated August 6, 2014 of the Minister of Finance guiding the implementation of tax obligations applicable to foreign organizations and individuals doing business in Vietnam or having income in Vietnam:

Clause 1, Article 1, Chapter 1 stipulates the subjects of application:

"The guidance in this Circular applies to the following subjects (except for the cases stated in Article 2, Chapter I):

1. Foreign business organizations with or without a permanent establishment in Vietnam; foreign business individuals who are residents in Vietnam or not residents in Vietnam (hereinafter referred to as Foreign Contractors, Foreign Subcontractors) doing business in Vietnam or having income arising in Vietnam on the basis of contracts, agreements, or commitments between Foreign Contractors and Vietnamese organizations or individuals or between Foreign Contractors and Foreign Subcontractors to perform a part of the work of the Contractor's Contract...".

Article 6 stipulates the subjects subject to VAT:

"Article 6. Subjects subject to VAT

"1. Services or services associated with goods subject to VAT provided by foreign contractors and foreign subcontractors on the basis of contractor contracts and subcontractor contracts used for production, business and consumption in Vietnam (except for the cases specified in Article 2, Chapter I), including:

- Services or services associated with goods subject to VAT provided by foreign contractors and foreign subcontractors in Vietnam and consumed in Vietnam;

- Services or services associated with goods subject to VAT provided by foreign contractors and foreign subcontractors outside Vietnam and consumed in Vietnam...".

Article 7 stipulates income subject to corporate income tax:

"1. Taxable income of foreign contractors and foreign subcontractors is income arising from activities of supplying and distributing goods; providing services and services associated with goods in Vietnam on the basis of contractor contracts and subcontractor contracts (except for the cases specified in Article 2, Chapter I)".

Article 8 stipulates the subjects and conditions of application.

Article 11 stipulates the subjects and conditions for applying VAT and CIT payment according to the rate method calculated on revenue (referred to as the direct method):

"If a foreign contractor or foreign subcontractor fails to meet one of the conditions stated in Article 8, Section 2, Chapter II, the Vietnamese Party shall pay taxes on behalf of the foreign contractor or foreign subcontractor according to the instructions in Article 12 and Article 13, Section 3, Chapter II."

Article 12 stipulates VAT as follows:

"1. Revenue subject to VAT

… 2. Percentage to calculate VAT on revenue:

a) Percentage to calculate VAT on revenue for business lines:…”.

Article 13 stipulates corporate income tax as follows:

"1. Revenue subject to corporate income tax

… 2. Corporate income tax rate (%) calculated on taxable revenue

a) Corporate income tax rate (%) calculated on taxable revenue for business lines:…”.

Pursuant to Circular No. 80/2021/TT-BTC dated September 29, 2021 of the Minister of Finance guiding the implementation of a number of articles of the Law on Tax Administration and Decree No. 126/2020/ND-CP dated October 19, 2020 of the Government detailing a number of articles of the Law on Tax Administration:

Clause 1, Article 76 stipulates direct tax registration of foreign suppliers.

Clause 1, Article 77 provides guidance on tax declaration and direct tax calculation of foreign suppliers.

Article 78 provides for direct tax payment by foreign suppliers.

Article 79 stipulates the authorization for tax registration, tax declaration and tax payment in Vietnam by foreign suppliers.

Clause 1, Article 81 stipulates the responsibilities of organizations and individuals in Vietnam involved in the purchase of goods and services from foreign suppliers:

"1. Organizations established and operating under Vietnamese law, organizations registered to operate under Vietnamese law that purchase goods and services from foreign suppliers or distribute goods and provide services on behalf of foreign suppliers that do not register for tax, declare tax, and pay tax in Vietnam according to the provisions of Articles 76, 77, 78, and 79 of this Circular, then the organization purchasing goods and services or distributing goods and services on behalf of foreign suppliers is obliged to declare, deduct, and pay tax on behalf of foreign suppliers the amount of tax payable according to the provisions of Circular No. 103/2014/TT-BTC dated August 6, 2014 of the Ministry of Finance...".

Pursuant to Circular No. 96/2015/TT-BTC dated June 22, 2015 of the Ministry of Finance guiding on corporate income tax in Decree No. 12/2015/ND-CP dated February 12, 2015 of the Government.

In Article 4 amending and supplementing Article 6 of Circular No. 78/2014/TT-BTC (amended and supplemented in Clause 2, Article 6 of Circular No. 119/2014/TT-BTC and Article 1 of Circular No. 151/2014/TT-BTC) as follows:

"Article 6. Deductible and non-deductible expenses when determining taxable income

1. Except for the non-deductible expenses specified in Clause 2 of this Article, enterprises are allowed to deduct all expenses if they meet the following conditions:

a) Actual expenses incurred related to the production and business activities of the enterprise.

b) Expenses have sufficient invoices and legal documents according to the provisions of law.

c) Expenses if there is an invoice for purchasing goods or services each time with a value of 20 million VND or more (price including VAT) when paying must have a non-cash payment document.

Non-cash payment documents are made in accordance with the provisions of legal documents on value added tax.

In case of purchasing goods or services each time with a value of twenty million VND or more...".

Based on the above provisions, in principle, foreign organizations, foreign contractors and income arising in Vietnam based on contracts, agreements or commitments between foreign contractors and Vietnamese organizations and individuals are subject to tax obligations according to Circular No. 103/2014/TT-BTC.

In case a foreign contractor does not register for tax, declare tax, and pay tax in Vietnam according to the provisions of Articles 76, 77, 78, and 79 of Circular No. 80/2021/TT-BTC, the organization purchasing goods and services or distributing goods and services on behalf of the foreign contractor is obliged to declare, deduct, and pay tax on behalf of the foreign contractor according to the provisions of Circular No. 103/2014/TT-BTC.

Regarding VAT: The subjects subject to VAT are implemented according to the provisions in Clause 1, Article 6 of Circular No. 103/2014/TT-BTC. The percentage rate for calculating VAT on revenue is implemented according to the provisions in Clause 2, Article 12 of Circular No. 103/2014/TT-BTC.

Regarding corporate income tax: Income subject to corporate income tax is implemented according to the provisions of Clause 1, Article 7 of Circular 103/2014/TT-BTC. The percentage of corporate income tax calculated on taxable revenue is implemented according to the provisions of Clause 2, Article 13 of Circular 103/2014/TT-BTC.

Expenses are included in deductible expenses when determining the taxable income of your company if they meet the conditions specified in Clause 1, Article 4 of Circular No. 96/2015/TT-BTC and do not fall under the cases of expenses that are not deductible when determining taxable income of your company as prescribed in Clause 2, Article 4 of Circular No. 96/2015/TT-BTC.

For specific cases, Ms. Linh is requested to provide documents related to the problem and contact the direct tax authority for specific instructions.