Vietnam has established the Foreign Contractor Withholding Tax (FCWT), which is not a special tax, but a system for calculating and paying VAT and CIT. Under the FCWT regime, it is not generally important whether a foreign company has a PE in Vietnam. With a PE, no exemption from FCWT-CIT under a DTA is possible. Without a PE, exemption from FCWT-CIT is possible but very complicated to achieve. In no case is exemption from FCWT-VAT possible.
The administration of the FCWT is normally straightforward. If another method has not actively been chosen, the withholding method is applied. The Vietnamese partner must calculate and apply the FCWT, while the foreign contractor does not have to proceed with any registration or declaration, whether there is a PE or not. If a PE is created, the foreign contractor may choose to be taxed for this contract just like a Vietnamese company, or have the withholding system applied on the FCWT-CIT under the mixed method and have the VAT calculated and paid under the credit method, with paid input VAT refunded.
More recently, tax authorities have been meticulously checking additional sources of taxation. Certain PE constellations are of special interest.
If a PE in Vietnam is used for a foreign entity’s business in third countries, the full contractual revenue is subject to taxation under the FCWT regime in Vietnam. In several cases, Representative Offices established in Vietnam operate regional business. Representative Offices are not legal entities and are not allowed to operate such activities. For example, if the Representative Office handles sales for a German company represented in Vietnam via the Representative Office in India, the full contract is taxable in Vietnam. Investigating this is a new development.
By means of Official Letter 2623/TCT-CS, the General Department of Taxation has clarified that a foreign e-commerce entity with revenue from Vietnam is subject to FCWT. A customer that is an enterprise registered in Vietnam must calculate the FCWT, deduct it from payment to the foreign entity and make a payment to the State Budget. If the enterprise in Vietnam makes the full payment requested to the seller and pays the FCWT on top to the State Budget, the payment is a non-deductible expense. If the foreign e-commerce business has private persons as customers in Vietnam, it must appoint a tax agent in Vietnam for calculating FCWT and making the related payment to the State Budget, or establish an office in Vietnam for handling this. This regulation has so far largely been ignored by foreign businesses.
Uber Netherlands has faced claims by the Vietnamese tax authority, but it has not fully paid; it transferred its active business to Grab and is no longer active in Vietnam. Uber was officially declared a target of tax inspections in the tax authority’s action plan, and others will follow.
For achieving exemption from FCWT-CIT under the provisions of a DTA, an extensive dossier must be filed with the tax authority before commencing the relevant business. The tax authority will not normally respond to this, and might well decide, years later during a tax audit, that conditions for a FCWT-CIT exemption have not been met. To avoid this risk, many foreign companies therefore find it more convenient to structure the project in a way that clearly establishes a PE. The result is that no exemption from FCWT-CIT in Vietnam is possible and double taxation can be avoided in the home country.