VAT RATES FOR FOREIGN CONSTRUCTION CONTRACTORS

Value-Added Tax (VAT) is a critical legal aspect that foreign contractors must carefully consider when engaging in construction projects in Vietnam. According to the regulations, VAT rates are not fixed but vary depending on the nature of the services, goods provided, and specific conditions outlined in the contract. Understanding these regulations not only ensures compliance with the law but also aids contractors in managing costs effectively and maintaining a competitive edge in this promising market. Then, what is the applicable VAT rate for foreign construction contractors under current regulations?

When are foreign construction contractors required to pay VAT?

A “foreign construction contractor” is defined as an entity engaged in business activities in Vietnam under a contractor agreement with Vietnamese organizations or individuals (acting as the “main contractor”) or with other foreign entities operating in Vietnam under subcontractor agreements (acting as the “subcontractor”).

Foreign construction contractors are considered taxpayers in Vietnam if they conduct business or earn income in the country. VAT obligations can be fulfilled through the declaration method or the hybrid method, depending on the following conditions:

–  The contractor must have a permanent establishment in Vietnam or qualify as a tax resident in Vietnam.

– The term of business operations in Vietnam under the contractor or subcontractor agreement must be 183 days or more from the effective date of the agreement.

– The contractor must adopt Vietnam’s accounting system and register for tax, particularly when applying the credit method for VAT payment.

What is the VAT rate applicable to foreign construction contractors?

The percentage for calculating VAT on the revenue of foreign construction contractors is determined as follows:

Determining the VAT rate on revenue applied to business fields:

For construction, installation inclusive of raw materials, machinery and equipment, the applicable rate is 5% of revenue.

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 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.

>> FOREIGN CONTRACTOR IN VIETNAM, KEY LEGAL REQUIREMENTS https://linconlaw.vn/foreign-contractor-in-vietnam-key-legal-requirements/

>> PENALIZING PROJECT OWNER FOR LACK OF FOREIGN CONTRACTOR LICENSE https://linconlaw.vn/penalizing-project-owner-for-lack-of-foreign-contractor-license/