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KoreanHOW TO CALCULATE FOREIGN CONTRACTOR TAX
1. Methods of calculating foreign contractor tax
There are 2 methods of calculating contractor tax: the declaration method and the direct method.
a/ Declaration method: applicable to contractors that fully satisfy the following conditions:
- Having a permanent establishment in Vietnam or being a resident in Vietnam.
- The business term in Vietnam is 183 days or more from the effective date of the contractor contract or subcontractor contract.
- Apply the Vietnamese accounting regime and make tax registration, be granted a tax identification number by the tax authority.
b. Direct method: applicable to contractors who do not meet the above conditions.
2. How to calculate contractor tax by direct method
a. How to calculate contractor VAT
| VAT payable | = | Revenue subject to VAT | x | VAT rate |
- Revenue subject to VAT
Revenue subject to VAT is total revenue from provision of services and services attached to goods, exclusive of payable taxes and amounts paid on behalf of Vietnamese parties (if any).
- If the contract that revenue does not include VAT, the revenue subject to VAT must be converted into VAT-inclusive revenue and shall be calculated as follows:
| VAT-exclusive revenue | ||
| Revenue subject to VAT | = | |
| 1 - VAT rate |
- If a foreign contractor signs a contract with Vietnamese sub-contractors or foreign sub-contractors who pay tax using direct method or foreign sub-contractors who pay tax using mixed methods to do part of the works in the main contract signed with the Vietnamese entity, and a list of such Vietnamese sub-contractors and foreign sub-contractors is enclosed with the main contract, the revenue subject to VAT of the foreign contractor does not include the value of works carried out by Vietnamese sub-contractors or foreign sub-contractors.
In case the foreign contractor signs a contract with suppliers in Vietnam to buy raw materials, machinery and equipment to execute the main contract, buy goods/services serving internal use or the works other than those in the main contract, the values of such goods/services shall not be deductible when calculating revenue subject to VAT of the foreign contractor.
Example: Foreign contractor A signs a contract to build cement factory Z with a Vietnamese entity. The total contract value is USD 10 million inclusive of VAT. According to the main contract, foreign contractor A shall delegate part of the construction (stipulated in the main contract signed with the Vietnamese entity) to Vietnamese sub-contractor B, which is valued at USD 01 million exclusive of VAT. Furthermore, during the construction process, foreign contractor A buys building materials (bricks, cement, sand, etc.), other goods and services such as stationery, car rental and hotel rooms for experts, etc. to serve the contract execution.
In this case, the revenue subject to VAT earned by foreign contractor A is calculated as follows:
Revenue subject to VAT = USD 10 million – USD 1 million = USD 9 million
Do not subtract the value of raw materials, goods and services such as car rental, hotel rooms, stationery, etc. from the revenue subject to VAT of foreign contractor A.
- Revenue subject to VAT from renting out vehicles, machinery and equipment is the total rent. If the revenue from renting out vehicles machinery and equipment includes the costs directly paid by the renters such as insurance, costs of maintenance, registration, operators, and shipment to Vietnam, the revenue subject to VAT does not include such costs if proving documents are presented.
- With regard to outbound (from Vietnam to abroad) international logistics services (whether the service charge is paid by the consignor or the consignee), revenue subject to VAT is the whole revenue received by the foreign contractor exclusive of international transport charge payable to the shipping company.
- With regard to outbound international delivery services from Vietnam to abroad (whether the service charge is paid by the consignor or the consignee), revenue subject to VAT is the whole revenue received by the foreign contractor.
- VAT rate
| No. | Trade | 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 |
Determination of revenue VAT rates in some cases:
- If the main contract or subcontract consists of various business activities or part of the contract value is not subject to VAT, VAT rates shall be applied separately on each business activity carried out by the foreign contractor or foreign sub-contractor. If the value of each business activity cannot be separated, the highest VAT rate shall apply to the whole contract value.
With regard to construction/installation inclusive of raw materials or machinery and equipment: if the value of each activity can be separated, the foreign contractor is 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. With regard to construction/installation inclusive of raw materials or machinery and equipment: if the value of each activity can be separated, the foreign contractor is 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. Where the foreign contractor signs contracts with subcontractors to delegate the works inclusive of raw materials or machinery and equipment, and the foreign contractor only provide the other services under the main contract, 5% VAT on service provision shall apply.
Example: Foreign contractor A signs a contract to build power plant X with a Vietnamese entity. The contract value is USD 75 million (inclusive of VAT).
Case 1: Value of each business activity can be separated:
+ Value of machinery and equipment provided for the construction: USD 50 million.
Value of machinery and equipment subject to VAT: USD 30 million.
Value of machinery and equipment not subject to VAT: USD 15 million.
Value of warranty services attached thereto: USD 5 million.
+ Value of technological line design and other design services: USD 5 million.
+ Value of workshops, other auxiliary systems, construction, and installation: USD 15 million.
+ Value of supervision services and installation guide: USD 3 million.
+ Value of operation training and test run services: USD 2 million.
During importation, VAT on USD 30 million of machinery and equipment has been paid. Value of machinery and equipment not subject to VAT is USD 15 million.
Foreign contractor shall only pay VAT on the value of services and construction/installation in the contract signed with the Vietnamese entity. Value of services (warranty, design, supervision, installation guide, technical training, test run) is USD 15 million, which applies 5% VAT on revenue from service provision; value of construction and installation is USD 15 million, which applies 3% VAT on revenue from construction and installation (VAT is not imposed on value of imported machinery and equipment).
Case 2: The main contract does not separate value of each business activity and only specifies that the contract value include machinery, equipment, design services, supervision services, installation guide, technical training, and test run services. If there are not adequate documents proving the payment of VAT on machinery and equipment during importation, foreign contractor A shall pay 3% VAT on the whole contract value, which is USD 75 million.
Case 3: Where foreign contractor A signs contracts with subcontractors to delegate the works inclusive of raw materials and foreign contractor A only provide the other services (such as supervision service, installation guide) the value of such services shall apply 5% VAT.
- With regard to contracts to provide machinery and equipment that include services performed in Vietnam, if value of machinery and equipment can be separated from value of services, corresponding VAT rates shall apply to corresponding parts of the contract. If the value of services cannot be separated from the value of machinery and equipment, 3% VAT shall apply.
Example: Korean contractor H, who does not follow Vietnam’s accounting practice, signs a contract with company B in Vietnam to provide machinery and equipment attached to installation and test run services for USD 10 million. The contract does not separate the value of machinery and equipment from the value of services, 3% VAT shall apply.
b. Corporate income tax
| CIT payable | = | Revenue subject to CIT | x | CIT rate |
- Revenue subject to CIT
Revenue subject to CIT is the total revenue exclusive of VAT received by the foreign contractor or foreign sub-contractor, exclusive of taxes payable. Revenue subject to CIT includes the costs paid by the Vietnamese entity on behalf of the foreign contractor or foreign sub-contractor (if any).
Determination of revenue subject to CIT in some cases:
- If the main contract or subcontract stipulates that revenue received by the foreign contractor or foreign sub-contractor is exclusive of CIT, the revenue subject to CIT shall be calculated as follows:
| CIT-exclusive revenue | ||
| Revenue subject to CIT | = | |
| 1 - CIT rate |
- If a foreign contractor signs a contract with Vietnamese sub-contractors or foreign sub-contractors who pay tax using direct method or foreign sub-contractors who pay tax using mixed methods to do part of the works in the main contract signed with the Vietnamese entity, and a list of such Vietnamese sub-contractors and foreign sub-contractors is enclosed with the main contract, the revenue subject to CIT of the foreign contractor does not include the value of works carried out by Vietnamese sub-contractors or foreign sub-contractors.
In case the foreign contractor signs a contract with suppliers in Vietnam to buy raw materials, machinery and equipment to execute the main contract, buy goods/services serving internal use or the works other than those in the main contract, the values of such goods/services shall not be deductible when calculating revenue subject to CIT of the foreign contractor.
- Revenue subject to CIT from lease of vehicles, machinery and equipment is the total rent. If the revenue from renting out vehicles machinery and equipment includes the costs directly paid by the renters such as insurance, costs of maintenance, registration, operators, and shipment to Vietnam, the revenue subject to CIT does not include such costs if proving documents are presented.
- Revenue subject to CIT of a foreign airline is the revenue from selling tickets, airway bills, and other revenues (except for those collected on behalf of the State or other organizations as prescribed by Vietnam’s law) in Vietnam from transport of passengers, cargo, and other objects by their own flights or flights in cooperation with other airlines.
Example: In the 1st quarter of 2013, foreign airline A earns a revenue of USD 100,000, including USD 85,000 from passenger air tickets, USD 10,000 from airway bills, and USD 5,000 from miscellaneous charges orders (MCOs); USD 1,000 of airport fees is collected on behalf of the state; USD 2,000 is paid for returned tickets.
Revenue subject to CIT earned by foreign airline A in the 1st quarter of 2013 is calculated as follows:
Revenue subject to CIT = 100,000 – (1,000 + 2,000) = 97,000 (USD)
- Revenue subject to CIT of a foreign marine shipping company is the total charge for transport of passengers, cargo, and other surcharges received by the shipping company from the loading port to the unloading port (including charge for the consignments transit through intermediate ports) and/or charge fro transport of cargo between Vietnam’s ports.
The charge being the basis for calculating CIT does not include the charge on which CIT has been paid at a Vietnam’s port and the charge paid to a Vietnamese courier for transporting goods from a Vietnam’s port to an intermediate port.
Example: Company A acts as an agent of foreign marine shipping company X. According to the agent contract, company A, on behalf of company X, receives goods to be transported abroad, issues bills of lading, collects charges, etc.
Company B of Vietnam hires company X (via company A) to transport goods from Vietnam to America for USD 100,000.
Company A hires ships from Vietnamese or foreign companies to carry goods from Vietnam to Singapore for USD 20,000. From Singapore, goods shall be transported to the USA by ships of company X.
Revenue subject to CIT of company X is calculated as follows:
Revenue subject to CIT = 100,000 – 20,000 = 80,000 USD
- Revenue subject to CIT from outbound logistics services from Vietnam to abroad (whether the service charge is paid by the consignor or consignee) is the whole revenue received by the foreign contractor exclusive of international transport charge payable to the courier (by air or by sea).
- Revenue subject to CIT from outbound postal services from Vietnam to abroad (whether the service charge is paid by the consignor or consignee) is the whole revenue received by the foreign contractor.
- Revenue subject to CIT from reinsurance is calculated as follows:
+ Revenue subject to CIT from ceding reinsurance abroad is the charge for ceding reinsurance abroad received by the foreign contractor (including reinsurance commission and indemnity paid to clients as agreed).
+ Revenue subject to CIT from receipt of reinsurance from abroad is the reinsurance commission received by the foreign contractor.
- Revenue subject to CIT from transferring securities and certificates of deposit is the total revenue from selling securities and certificates of deposit at that time.
- Revenue subject to CIT from interest rate swap (IRS) is the difference between the interest receivable and interest payable received by the foreign contractor within a calendar year. The determination of tax period according to calendar years is specified in the Law on Corporate income tax, the Law on Tax administration, and their guiding documents.
- CIT rates (%) applied to trading
| No. | Trade | CIT rate |
| 1 | Trading: distribution, supply of goods, raw materials, supplies machinery and equipment; distribution of goods, raw materials, supplies, machinery and equipment attached to services in Vietnam (including those provided in the form of domestic exports, except for goods processed under processing contracts with foreign entities); supply of goods under Incoterms | 1 |
| Lease of machinery and equipment, insurance, lease of oilrig. | 5 | |
| 2 | - Restaurant, hotel, casino management services | 10 |
| - Derivative financial services | 2 | |
| 3 | Lease of aircraft, aircraft engines, parts of aircrafts and ships | 2 |
| 4 | Construction, installation, whether or not inclusive of raw materials, machinery and equipment | 2 |
| 5 | Other business activities, transport (including sea transport and air transport) | 2 |
| 6 | Transfer of securities, certificates of deposit, ceding reinsurance abroad, reinsurance commission | 0.1 |
| 7 | Loan interest | 5 |
| 8 | Income from copyright | 10 |
CIT rates in some cases:
- If a main contract or subcontract consists of various business activities, the application of CIT rates to each business activity carried out by the foreign contractor or foreign sub-contractor shall be specified in the contract. If the value of each business activity cannot be separated, the highest CIT rate shall apply to the whole contract value.
With regard to construction and installation services inclusive of raw materials or machinery and equipment: if the value of each business activity is separated in the main contract, corresponding CIT rate shall apply to each of them. If the value of each business activity cannot be separated, the 2% CIT shall apply to the whole contract value. Where the foreign contractor signs a contract with subcontractors to delegate the works inclusive of raw materials or machinery and equipment, and the foreign contractor only provide the other services under the main contract, 5% VAT on service provision shall apply.
Example: Foreign contractor A signs a contract to build power plant X with a Vietnamese entity. The contract value is USD 75 million (exclusive of VAT and inclusive of CIT).
Case 1: Value of each business activity can be separated:
+ Value of machinery and equipment provided for the construction: USD 50 million.
Including:
Value of machinery and equipment: USD 45 million
Value of warranty services attached thereto: USD 5 million
+ Value of technological line design and other design services: USD 5 million
+ Value of workshops, other auxiliary systems, construction, and installation: USD 15 million.
+ Value of supervision and installation guide: USD 3 million.
+ Value of operation training and test run services: USD 2 million.
1% CIT shall apply to USD 45 million of machinery and equipment, 2% CIT shall apply to USD 15 million of construction and installation; 5% CIT shall apply to USD 15 million of other services (warranty, design, supervision, installation guide, technical training, and test run).
Case 2: If the value of each business activity cannot be separated, the 2% CIT shall apply to the whole contract value which is USD 75 million.
Case 3: Where foreign contractor A signs contracts with subcontractors to delegate the works inclusive of raw materials and foreign contractor A only provide the other services (such as supervision service, installation guide) the value of such services shall apply 5% VAT.
- With regard to contracts to provide machinery and equipment that include services performed in Vietnam, if value of machinery and equipment can be separated from value of services, fixed CIT rates shall apply to corresponding parts of the contract. If the value of services cannot be separated from the value of machinery and equipment, 2% CIT shall apply.
Example: Foreign contractor A signs a contract with a Vietnamese entity to provide a production line for USD 70 million, Including:
+ Value of machinery and equipment provided for the construction: USD 60 million.
+ Value of technological line design and other design services: USD 5 million
+ Value of supervision and installation guide: USD 3 million.
+ Value of operation training and test run services: USD 2 million.
If the value of machinery and equipment can be separated from value of services, the value of machinery and equipment shall apply CIT rate on trading; the value of design, supervision, installation, training, and test run services shall apply CIT rate on service provision.
Otherwise, 2% CIT shall apply to the whole contract value (USD 70 million).
- CIT on compensation paid by the party that breaches the contract, which is higher than the damage and thus considered a taxable income:
Foreign contractor may pay CIT on the income from compensation at the rate of CIT on taxable revenue or according to the declaration of revenue and expense with the common tax rate.
