Foreign Contractor Tax is no longer new tax, but enterprises concurrently are always confused or cannot acknowledge whether they have incurred foreign contractor tax. We would like to share 2 topics for your reference: What is foreign contractor tax, and how to calculate foreign contractor tax?

A kind reminder, foreign contractor tax, is a mixture of “value-added tax and corporate income tax” or “value-added tax and personal income tax”. If a foreign enterprise or individual has benefits arisen in Vietnam, they must pay foreign contractor tax. Vietnamese enterprises must be responsible for deductions when making payments.

Therefore, when entering a contract with foreign companies, you must immediately acknowledge the foreign contractor's tax obligation. The key point could be obliterated is the nature of foreign contractor tax, accordingly, the foreign contractor is the taxpayer, but the deduction and submission this tax are your obligations. If you do not clearly know this issue, you must understand that you are on behalf of the foreign contractor to submit this tax.

We hereby to share the main identification signs and the obligation arising foreign contractor tax with you – Vietnamese enterprises.

We have 6 specific identification signs to be noted as follows:

Firstly, when having payment for foreign individuals or companies, there will be foreign contractor tax.

Secondly, importing and purchasing goods including accompanying services such as installation, trial operation, delivery services. It should be noted that this service may not arise yet, but it is stipulated in the contract and still applicable.

Thirdly, importing or purchasing goods, excluding accompanying services, but the delivery condition is group D according to the International Commercial Terms (Incoterms) such as DDU, DDP. The cases of foreign contractor tax omitted, often occur when buying goods imported by road, purchased via postal service, or purchased as hand-carried by plane.

The companies often do not pay attention to this point, because the goods arrived at the warehouse but are not mentioned by any agency, and are only detected through the inspection of the tax authority. 

Fourthly, buying and importing goods into Vietnamese territory from tax-suspension warehouses and bonded warehouses, although they have completed all import procedures, this is a risk that companies often omitted. In this case, we must understand why we are subjected to foreign contractor tax and search the concept of bonded warehouse. The bonded warehouse is the warehouse established in Vietnamese territory Thus, according to such regulation, the sale and purchase of goods for which the place of delivery at the bonded warehouse is construed as delivery within the territory of Vietnam. Please refer to the Official Letter No. 5722 of the General Tax Department issued in 2014.

Fifthly, using services of foreign companies, which are provided or consumed in Vietnam. Kindly be noted that services that are not clearly defined consumption boundaries, such as services via the internet, television, and radio, the risk of being subjected to the foreign contractor tax is extremely high.

Sixthly, other payments that are considered income of foreign individuals and foreign companies arising in Vietnam such as loan interest payable, franchise costs, management fees, advertisement fees, direct or online training fees, penalties, and contract compensation.

Such cases are often omitted because these types of payments are not easily distinguishable services or goods.

We have just viewed 6 specific identification signs of foreign contractor tax, and have already acknowledged them, please pay attention in drafting the contract:

If the signed contract could not be separated the value of the goods and the value of the accompanying services, including free accompanying services, foreign contractor tax is calculated for the whole contract.

If the signed contract could not be separated the value of each business activity, the highest percentage of tax calculation shall be applied to the business line of the entire contract value.