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General common issues related to contractor tax

Taxes are always a matter of particular concern for businesses and individuals, because the tax that businesses and individuals have to pay partly affects the profit after tax of such individuals and organizations. In essence, the purpose when the parties do not include organizations and individuals when participating in a transaction, they all want to maximize profits, minimize costs and especially consider the number of the tax they have to pay. Currently, cross-border transactions are becoming more and more diverse owing to the development of the internet, parties can provide services such as consulting services, brokerage services,… that this supply takes place in two different countries.

The issues are that foreign organizations or individuals earn income from service provision in Vietnam, for example, Singaporean individuals brokers for a Vietnamese trader to find goods buyers. Is the amount of money paid by the broker being a foreign organization or foreign individual? If yes, what kind of tax? How tax rates are applied, ...?

In order to answer these questions, when a foreign organization or foreign individual earns income in Vietnam, they must pay the contractor tax. Accordingly, the tax amount to be taxed is based on a certain percentage of the income generated. Foreign Contractor Tax (FCT) is a tax that foreign organizations and individuals must pay when generating income from the provision of services or services associated with goods in Vietnam. Currently, the main adjusted legal document on contractor tax is prescribed in Circular 103/2014/TT-BTC dated on August 6, 2014 guidelines for the fulfillment of tax liability of foreign entities doing business in Vietnam or earning income in Vietnam (hereinafter referred to as "Circular 103/2014"). Depending on each case, the taxpayers are foreign organizations or foreign individuals, then compare and apply the corresponding guiding documents.

From the above definition, we define the subjects of application of such contractor tax as "foreign organizations and foreign individuals earning incomes in Vietnam on the basis of contracts, agreements or organizations and individuals of the country. Besides, through Vietnamese organizations and individuals to negotiate and sign contracts in the name of foreign organizations and individuals, ... ". Accordingly, foreign organizations include (i) having permanent establishments in Vietnam and (ii) having no permanent establishments in Vietnam; Foreign individuals include (i) residing in Vietnam and (ii) not residing in Vietnam. However, not all cases where foreign organizations and foreign individuals are subject to Foreign Contractor Tax.

This means that only foreign organizations and foreign individuals who are one of the cases specified in Article 2 of Circular 103/2014 will not have to pay the contractor's tax obligations whether business activities are subject to tax. For example, an individual has income from services provided and consumption but that supply and consumption activity is not within the territory of Vietnam. Accordingly, based on Clause 3, Article 2 of Circular 103/2014, foreign individuals will not be subject to the adjustment of contractor tax so that no tax obligation will be incurred. To be more specific, foreign organizations will pay two taxes is income tax and value added tax.

Business income tax and corporate tax increase will apply the guidance in Circular 103/2014. Foreign individuals will pay personal income tax and value added tax. In particular, the portion of personal income tax is governed by the system of related documents on personal income tax and value added tax will be applied in accordance with Circular 103/2014.

To clarify the above content, consider the following specific case: Party A (Vietnamese nationality) wants to find a partner to buy goods manufactured by Party A. Therefore, Party A agrees on the brokerage contract with Party B as an individual (Taiwanese nationality) so that Party B may broker Party A to sell goods to Party C (Vietnam). The goods sold will be consumed in Vietnam because Party C is the buyer and also the distributor. Party B has fulfilled the brokerage obligation between Party A and Party C. Based on the brokerage contract, Party B will be paid brokerage fees by Party A.

Considering in the above case, Party B is a foreign individual; have income generated in Vietnam; Party B provides brokerage services to Party A. Therefore, before Party A pays the brokerage fee under the brokerage contract, Party A is obliged to deduct an amount from the profits that Party B has to pay withholding tax (tax deduction at source). Party B will pay value added tax and personal income tax. Regarding value added tax, the tax rate for Party B's tax rate is 5%, the basis for calculating tax is the turnover to calculate value added tax and the percentage for calculating VAT on turnover. With respect to personal income tax, the tax rate for income from business activities is 5%.

In conclusion, contractor tax is a tax that a foreign organization or a foreign individual has to pay tax if they are one of the cases prescribed by law. Currently, there are many ways for foreign organizations and individuals to pay contractor tax, such as tax deduction at source; paying by the tax code; online tax declaration and payment, etc. However, for contractor tax in particular and other taxes in general, before concluding tax amounts payable by specific subjects, taxpayers must be identified the tax; specific tax rates, ...
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