Interview: Dinh Thi Quynh Van
How does the tax regime apply to foreign firms that operate in Vietnam without a legal presence?
DINH THI QUYNH VAN: Vietnam is still developing its tax system. The current system often does not cater to certain situations, or existing regulations are not thoroughly applied in practice. For example, Vietnam has permanent establishment regulations in the corporate income tax law, but we rarely see these rules applied to collect tax from foreign firms doing business in Vietnam without setting up a legal presence, such as a company or a branch. Instead, tax is collected via the foreign contractor tax (FCT) mechanism. Under the FCT mechanism, the Vietnamese company or business individual that contracts with the foreign company is responsible for withholding FCT from certain payments to the foreign company, and declaring and paying the tax on behalf of the foreign company, irrespective of whether a permanent establishment is deemed to exist. However, this mechanism generally does not work if there are no payments from Vietnam, or where transactions occur with non-business individuals or payments via credit cards. This is particularly the case for internet commerce, which is still quite new in Vietnam but becoming more and more important. Big global players have entered Vietnam and the government has realised that the country loses tax revenues because there is no mechanism to collect tax from foreign internet and social media companies. The tax authorities are looking into ways to collect tax from these organisations, such as instructing banks to stop remittances.
What does Vietnam do to mitigate double taxation for foreign investors doing business here?
QUYNH VAN: The success of Vietnam in continuing to attract foreign investment depends not only on economic factors, but also on the tax environment and how the country can mitigate the effects of double taxation for foreign investors. Vietnam has a broad double tax treaty network, with more than 70 treaties signed and more expected. The network includes major countries in Asia and Europe, Australia, New Zealand, Canada and most recently the US. Foreign firms resident in countries that have a treaty with Vietnam may enjoy income tax exemption or reduction, depending on the type of income received and conditions being fulfilled. In contrast to neighbours such as Thailand or Indonesia, Vietnam does not levy withholding tax on dividend payments to foreign corporate investors. Corporate investors can remit dividends without additional tax being levied in Vietnam, so treaty protection is not necessary.
What challenges do foreign companies face when applying double tax treaties in Vietnam?
QUYNH VAN: Vietnam is very formalistic, with many administrative procedures that need to be followed strictly. This may be one of the reasons why available protections under double tax treaties are not yet fully utilised. Where benefits are available under a double tax treaty they do not apply automatically in Vietnam. The key document is the tax residency certificate issued by the overseas tax authority to confirm that the applicant is a tax resident of that country.
The notification procedure is done on a self-assessment basis, thus the Vietnam tax authorities will not immediately confirm the entitlement of the overseas company. This can present a challenge, in particular if the foreign company claims treaty benefits in relation to a transaction with a Vietnamese unrelated third party. Given that the Vietnamese party is responsible for withholding the tax correctly and the treaty benefit in most cases goes to the foreign party, Vietnamese parties are often unwilling to take the risk that the treaty claim will be rejected later on. Therefore, foreign companies doing business in the country need to keep this in mind in their pricing and during negotiations with Vietnamese counterparts.
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