The Ministry of Finance is preparing to issue a new circular on foreign contractor’s withholding tax (FCT) this month, under which FCT rates will not change from the current circular 169. The circular guiding the FCT regime is to be issued this month after long delays, according to Nguyen Dinh Cu, Head of the Tax Management Section for Foreign Invested Enterprises under the general Department of Taxation (GDT), who is charged with compiling the document.
VAT (value added tax) and CIT (corporate income tax) rates on taxable revenue will remain the same as stipulated in circular 169 on FCT enacted in 1998, but procedures for tax declaration and payment will be simplified, Cu said.
Explaining why the tax rates will remain unchanged, Cu said the document reflects the MoF principle that tax adjustment must not affect the current investment climate. Prior to that, the GDT had attempted to raise taxes, but the move drew heated opposition from foreign investors.
However, conflict remains over the issue. Representatives from local enterprises proposed raising FCT rates to help Vietnamese companies win bids for construction projects, or in goods and service supply. It is a difficult task for MoF to balance investment encouragement and the creation of a fair taxation for both foreign and local contractors, Cu said.
Furthermore, he added, the regulations must protect the right for reasonable tax collection by the Vietnamese government.
For example, there were some suggestions to tax only the value of services associated with equipment supplied by foreign investors (supervision, installation, or training), not on the equipment’s actual value. Nevertheless, the GDT decided that goods supply activities should be subject to FCT in Vietnam as well.
If the suggestion is accepted, it would reduce the number of people subject to FCT, which would not be in line with international practice, Cu said. The 10% tax (5% for CIT and 5% for VAT) proposed by GDT will ensure the right for taxation for the government, while equalising operations for both local and foreign enterprises, Cu said.
GDT also maintains its stance on the scope of FCT application, according to which, FCT will be imposed on all earnings in Vietnam, no matter if associated services are implemented inside or outside Vietnam’s territory.
According to Richard Irwin from the tax working sub-group under the framework of the Vietnam Business Forum, the provision means wider scope for taxation, since FCT will be levied on contractors working outside of Vietnam. This will mean a heavier tax burden for foreign contractors, thereby raising project costs for Vietnamese enterprises using foreign contractors.
Cu explained that the draft circular does not expand the scope of FCT application, but rather clarifies provisions as stipulated in the CIT Law, under which taxes are imposed on all earnings in Vietnam.
In fact, he said, there are many services that yield profit to contractors regardless of provision location, including brokerage commissions, royalty, or interest on loans.
Furthermore, contractors earning in Vietnam but not paying tax in Vietnam, still pay tax in the tax country they are registered in, spelling problems for the double taxation avoidance agreements Vietnam has signed with more than 40 countries.
Therefore, the FCT exemption for foreign contractors will not help Vietnamese enterprises save on project costs, Cu said.
Cu identified several other noteworthy changes in the draft circular. Foreign contractors will have to pay CIT on royalties, but not VAT on equipment leases. In addition, administrative procedures will be simplified for foreign contractors to declare taxes.
The circular is proposed for enactment on January 1, 2005. For contracts signed before January 1, 2005, taxes will be paid in accordance with the previous circular 169 until contract completion.