Remarkable new points of the regulations on foreign contractor tax
By Nguyen Thu Huyen
On 06 August 2014, the Ministry of Finance issued Circular No. 103/2014/TT-BTC guiding on the implementation of the tax liabilities applicable to foreign organizations, individuals doing business or earning incomes in Vietnam (“Circular 103”), taking effects as from 01 October 2014 and replacing Circular No. 60/2012/TT-BTCT dated 12 April 2012 (“Circular 60”). Regarding the contracts of the foreign contractors which were signed before the effective date of this Circular 104, the VAT and CIT will be continuously determined according to the guidance of the Circular 60 (the valid legal instrument at the signing date of these contracts).
Circular 103 extends significantly the new taxpayers of foreign contractor tax in comparison with the Circular 60, including the followings:
i. Foreign contractors distributing goods in Vietnam or providing goods under Incoterms rules that require the sellers to be responsible for goods that have been taken into Vietnam’s territory;
ii. Foreign contractors performing in whole or in part of goods distribution or service provision in Vietnam, who are still the owners of goods that are delivered to Vietnamese organizations or take responsibility for the cost of distribution, advertising, marketing, quality of goods/services delivered to Vietnamese organizations, or impose prices (including the cases in which the foreign entity authorities or hires some Vietnamese organization to perform part of the distribution or service provision pertaining to goods sale in Vietnam);
iii. Foreign contractors that negotiates or concludes contracts on the name of the foreign contractors via Vietnamese organizations, individuals;
iv. Foreign contractors exercising its right to export, import, distribute goods in Vietnam, buy goods to export, or sell goods to Vietnamese traders in accordance with the laws on commerce.
According to the provisions on new taxpayers, foreign traders implementing goods distribution via commercial agencies in Vietnam shall be subject to foreign contractor tax as under the Law on Commerce 2005 the principal is the owner of goods delivered to the agent; concurrently, the right to fix the price of goods and services, the responsibility of some kind of costs and goods quality of the foreign organization in providing goods, services in Vietnam could leads the result of being taxpayers regarding these business activities in Vietnam. In practice, the agreement of provision of goods and services could include clause under which the foreign traders are qualified as taxpayers. Therefore, the parties of any agreement, especially the Vietnamese party should bear in mind the above new regulations to promptly withdraw, make declaration and payment of taxes as required by laws.
Besides, foreign contractors providing goods, delivered at the foreign border checkpoint, not associated with services in Vietnam, even if the sellers is responsible for guaranty; and foreign contractors 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 are not subject to foreign contractor tax.
There is another remarkable point of Circular 103 applicable to construction activities inclusive of raw materials or machinery and equipment that to allow separating each activity for tax calculation instead of calculating tax basing on only the contract value as per the previous Circular 60. If the value of each activity can be separated, the foreign contractors are not required to pay VAT on the value of raw materials or machinery and equipment, which has been paid during importation or is exempt from VAT; corresponding VAT rate shall apply to the remaining value. It is similar to VAT that the correspond CIT rate shall apply to each separated activity. In case, each activity cannot be separated, the VAT of 3% and CIT of 2% shall be applied to the total contract value. Under this new provision, the foreign contractors are more flexible in choosing the favorable method for tax calculation basing on the value of raw materials, machinery and equipment in comparison with the rest activities.
New regulations on registration of foreign loans
By Nguyen Thu Huyen
On 15th September 2014, the State Bank of Vietnam issued the Circular No. 25/2014/TT-NHNN guiding procedures for registration, registration for change of Non-Government guaranteed foreign loans borrowed by enterprises (“Circular 25”). Circular 25 takes effect as from 1st November 2014, abrogating Article 1 of the Circular No. 25/2011/TT-NHNN dated 31st August 2011 and Chapter I, Section I Chapter IV of the Circular No. 09/2004/TT-NHNN dated 21st December 2014.
According to Circular 25, Non – Government guaranteed foreign loans which must be registered to the State Bank comprise:
(i) Medium, long term foreign loans (with the loan term above 01 (one) year which is determined as from the date proposed for the initial capital drawdown until the date proposed for the last loan repayment as stated in the foreign loan agreement);
(ii) Short term foreign loans (with the loan term up to 01 (one) year which is determined as from the date of the initial capital drawdown until the date proposed for the last loan repayment as stated in the foreign loan agreement, the agreement on extension) which have been extended that leads to the total loan term of over 01 (one) year;
(iii) Short term foreign loans without a contract for extension but which still have a loan balance at the first anniversary of the initial capital drawdown, except where the Borrower completes repayment of the loan within 10 days after such anniversary (the loan term is determined as from the date of the initial capital drawdown until the date prosed for the last loan repayment).
Comparing with the previous regulations on foreign loans registration, request for registration of short term foreign loans without a contract for extension but which still have a loan balance at the first anniversary of the initial capital drawdown with the State Bank is newly provided. The supplement of this provision enhances the State control on foreign loans borrowing and repayment activities and restricts the cases under which the parties intentionally avoid to sign contract on extension and to not register with the State Bank even though the repayment lasts for over 01 (one) year.
Under the Circular No. 12/2014/TT-NHNN dated 31st March 2014, foreign loan in Vietnamese Dong is only permitted in the following cases: (x) Borrower is a micro-finance institution; (y) Borrower is an enterprise with foreign direct investment capital borrowing from profit sharing in Vietnamese Dong from direct investment activities of Lender being foreign investor contributing capital in the Borrower; (z) the other cases to which the Governor of the State Bank provides consent based on actual situation and the necessity in each case. Accordingly, Circular No. 25 supplements provisions on application dossier for registration of these foreign loans in Vietnamese Dong which require document proving lawful distribution of profit in Vietnamese Dong from direct investment activities; certification from credit institution where the Borrower opened its direct investment capital account on the status of distribution and remittance of profit of Lender back to its home country; and explanation letter on the need for foreign loan in Vietnamese Dong if such loan is subject to consent of the Governor.
The application dossier for registration of foreign loans is added with news documents, including: Legal document of the party using the loan capital (if the borrower is not the party using the loan capital); Plan on restructuring foreign debt in case the foreign loan is used for restructuring the foreign debt; Official letter of the credit institution where the Borrower withdrew capital, made repayments of the foreign loan, confirming the status of such drawdowns or repayment of the loan debt (principal and interest) up to the time of registration of the foreign loans stated in (ii) and (iii) above and also in the case of medium, long term foreign loan arising where that part of the foreign investor remitted into Vietnam for cover costs of investment preparation is converted into a medium, long term loan of the enterprise with foreign direct invested capital.
The time limit for the State Bank to grant written confirmation of registration of foreign loan is 20 (twenty) days (longer than the time limit of 15 (fifteen) days under previous provisions) from the receipt date of a complete and valid dossier from the Borrower. In case of the foreign loan in Vietnamese Dong subject to Governor’s consent, the time limit is 60 (sixty) days.