FOREIGN CONTRACTOR VAT APPLIED IN WHICH CASES?

The contractor tax plays a crucial role in the management and development of the national economy, particularly in the context of expanding international cooperation and investment. For foreign organizations and individuals conducting business in Vietnam, the contractor tax is not only a financial obligation but also a tool for the Government to regulate revenue from the business activities of foreign entities. Furthermore, the implementation of the contractor tax reflects Vietnam’s commitment to fostering a healthy and transparent business environment, aligning with international standards to attract long-term and sustainable investment and cooperation. What are the legal provisions regarding foreign contractor VAT?

Which goods and services are subject to foreign contractor VAT?

Determined based on Article 6 of Circular 103/2014/TT-BTC, subjects subject to VAT (value added) include:

– Services or services associated with goods subject to VAT provided by foreign contractors and foreign subcontractors in Vietnam or outside Vietnam and consumed in Vietnam:

+ 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 that are provided by foreign contractors and foreign subcontractors outside Vietnam and consumed in Vietnam.

– Goods are provided under the contract in the following forms:

+ The point of delivery of goods is located within the territory of Vietnam, except in the case of  using a bonded warehouse or inland port (ICD) as a warehouse of goods to support international transportation, transit, border-gate transfer, and storage activities. goods or processed by other businesses;

+ Providing goods accompanied by services performed in Vietnam such as installation, test running, warranty, maintenance, replacement, and other services accompanying the supply of goods (including free accompanying services), the value of goods is only subject to VAT at the import stage, the value of services is subject to contractor VAT.

+ In case the contract cannot separate the value of goods and the value of accompanying services (including free accompanying services), the contractor’s VAT is calculated for the entire contract.

What is the VAT rate applicable to foreign contractors?

The percentage for calculating VAT on foreign contractors is determined as follows:

Determining the foreign contractor VAT rate on revenue applied to business fields:

As stipulated in Clause 2, Article 12 of Circular 103/2014/TT-BTC:

“2. The percentage for calculating VAT on revenue:

a) The percentage used to calculate VAT on revenue applied to business fields:

No.	Business lines	VAT rate (%)
1	Services, rental of machinery and equipment, insurance; construction, installation exclusive of raw materials, machinery and equipment.	5
2	Production, transportation, services attached to goods; construction, installation inclusive of raw materials, machinery and equipment.	3
3	Other trades	2

Determining the foreign contractor VAT rate on revenue for specific cases

– Contracts involving multiple business activities or portions of the contract not subject to VAT: the applicable VAT rate is determined based on the revenue generated from each taxable activity under the foreign contractor’s scope of work. If it is impossible to separately allocate the value of each business activity, the highest VAT rate applicable to the business sector involved will apply to the entire contract value.

– Construction and installation activities including the supply of materials or equipment along with the construction project:

+ When the value of each activity can be separately allocated: VAT is not payable on the value of materials or equipment already subjected to VAT at the importation stage or exempt from VAT. For the remaining portion of the work, the VAT rate corresponding to the relevant business activity is applied.

+ When the value of each activity cannot be separately allocated: A flat VAT rate of 3% applies to the total contract value (including the value of imported materials or equipment).

+ When the foreign contractor subcontracts all work involving the supply of materials or equipment to subcontractors and only performs service-based activities: A VAT rate of 5% applies to the revenue derived from the service portion of the contract.

In which cases is foreign contractor VAT not applied?

In the following cases, foreign organizations and individuals are not required to pay foreign contractor VAT:

– Any foreign entity doing business in Vietnam under the Law on Investment, the Law on Petroleum, and the Law on credit institutions.

– Any foreign entity that provides goods for Vietnamese entities without ancillary services in Vietnam in the form of:

+ Delivery at the foreign border checkpoint: the seller incurs all responsibility, costs, and risk to the transport and delivery of goods at the foreign checkpoint; the buyer incurs all the responsibility, cost and risk to the receipt and transport of goods from the foreign checkpoint to Vietnam (even if goods are delivered at a foreign border checkpoint under a contract which prescribes that the seller is responsible for warranty).

+ Delivery at a Vietnam’s border checkpoint: the seller incurs all responsibility, costs, and risk until goods reaches the Vietnam’s checkpoint; the buyer incurs all the responsibility, cost and risk to the receipt and transport of goods from the Vietnam’s checkpoint (even if goods are delivered at a Vietnam’s border checkpoint under a contract which prescribes that the seller is responsible for warranty).

– Any foreign entity that earns income from services provided and used outside Vietnam.

– Any foreign entity that provides any of the services below for Vietnamese entities, provided the services are provided overseas:

+ Repair of means of transport (aircraft, aircraft engine, aircraft and ship parts), machinery and equipment (including undersea cables and transmission devices), with or without spare parts;

+ Advertising and marketing (except for online advertising and online marketing);

+ Trade promotion and investment encouragement;

+ Brokering goods sale and services provision overseas;

+ Training (except for online training);

+ Division of charges for international telecommunications services between Vietnam and foreign contractors, which are provided outside Vietnam, lease of transmission lines and satellite frequency bands overseas as prescribed by the Law on telecommunications; division of charge for international postal services between Vietnam and other countries as prescribed by the Law on Postal services and international agreements on postal services to which Vietnam is a signatory, provided such services are provided outside Vietnam.

– Any foreign entity using a bonded warehouse or inland clearance depot (ICD) as a warehouse serving international transport, transit of goods, or storage of goods to be processed by other companies.

>> VAT RATES FOR FOREIGN CONSTRUCTION CONTRACTORS https://linconlaw.vn/vat-rates-for-foreign-construction-contractors/

>> CHARGING INTEREST ON SALARY ADVANCE, IS THE COMPANY ENTITLED TO? https://linconlaw.vn/charging-interest-on-salary-advance-is-the-company-entitled-to/