What is contractor tax? What is the contractor tax rate? How to calculate foreign contractor tax and determine the subject of contractor tax? Refer to details.
I. What is contractor tax?
Contractor tax (foreign contractor tax) is a type of tax applied to foreign organizations and individuals that generate income from providing services or goods within the territory of Vietnam;
Taxes that contractors must pay include: value added tax (VAT), corporate income tax (CIT) and personal income tax (PIT):
- Foreign enterprises generating revenue in Vietnam: subject to VAT and CIT;
- Foreign individuals generating income in Vietnam: subject to VAT and personal income tax.
II. Subjects subject to contractor tax and contractor tax rates
1. For contractors that are foreign business organizations
1.1. How to determine the subject of contractor tax
Subjects subject to contractor tax are foreign organizations that conduct business activities and generate revenue in Vietnam, including:
- Foreign organizations generate revenue from business activities in Vietnam. Based on the signing of contracts between foreign contractors and organizations and individuals in Vietnam. Or between foreign contractors and foreign subcontractors performing part or many jobs in Vietnam;
- Providing goods in the form of on-site import and export (excluding processing and return of goods);
- Carry out distribution and supply of goods in Vietnam that meet the delivery conditions in the international trade terms Incoterms. The seller will bear the risks related to the goods in the territory of Vietnam;
- Foreign organizations conduct part or all of their business activities in Vietnam. In which, the foreign organization is the owner of the goods, including distribution, transportation, advertising, etc., including cases where another party is authorized to perform the service;
- Foreign organizations through organizations and individuals in Vietnam conduct negotiations and sign contracts;
- Foreign organizations exercising import-export and distribution rights in Vietnam, including cases of purchasing goods for export or sale to Vietnamese traders.
1.2. Contractor tax rate in Vietnam
➤ Declaration method
Foreign organizations shall declare and calculate taxes like Vietnamese enterprises if they meet the following conditions:
- Organizations with permanent establishments in Vietnam;
- Having a business term in Vietnam under a subcontractor contract of 183 days or more;
- Enterprises apply Vietnamese accounting regime and are granted tax codes by tax authorities.
➤ Direct method
Applicable to foreign contractors who do not meet the conditions of the declaration method. Vietnamese enterprises are responsible for paying the contractor tax on behalf of foreign organizations.
- VAT rate for business lines:
| Equipment and machinery rental services, insurance; construction and installation without materials | 5% |
| Production, transportation, services associated with goods, construction and installation, and contracting of raw materials | 3% |
| Other business activities | 2% |
- Corporate income tax rate for business lines:
| Trade: distribution and supply of goods, raw materials, supplies, machinery and equipment associated with services in Vietnam, including the supply of goods in the form of on-site export (excluding cases of goods processing) | 1% |
| Equipment rental services, insurance, drilling rig rental | 5% |
| Restaurant, hotel, casino management | 10% |
| Other financial services | 2% |
| Aircraft, engine and aircraft spare parts leasing | 2% |
| Construction and installation with or without contract for materials, machinery and equipment | 2% |
| Other production and business activities, transportation (including sea and air transportation) | 2% |
| Transfer of securities, deposit certificates, reinsurance abroad | 0.1% |
| Loan interest | 5% |
| Copyright income | 10% |
For example:
Company ABC in Vietnam is provided with sea freight services from abroad to Vietnam by a foreign company D that does not have a permanent establishment in Vietnam. In this case, company D is subject to contractor tax with a VAT rate of 3% and a corporate income tax rate of 2%.
2. For contractors who are foreign business individuals
2.1. How to determine the subject of contractor tax
Pursuant to Clause 1, Article 1, Chapter 1 of Decree 90/2007/ND-CP dated May 31, 2007 of the Government, a foreign trader is a trader established and registered for business in accordance with foreign law or recognized by foreign law.
Pursuant to Circular No. 103/2014/TT-BTC dated April 6, 2014 of the Ministry of Finance, the subjects of application are:
- Foreign individuals doing business, whether resident or non-resident, or generating income in Vietnam (except foreign individuals doing business under the provisions of the Investment Law, the Petroleum Law, and the Law on Credit Institutions);
- Foreign individuals supplying goods in Vietnam in the form of on-site import and export and generating income in Vietnam (except for cases of processing and returning goods to foreign individuals);
- Foreign individuals distributing goods in Vietnam or supplying goods under the delivery terms of international trade terms – Incoterms in which the seller bears the risks related to the goods arriving in Vietnam;
- Foreign individuals deliver goods or authorize the performance of certain services such as transportation, distribution, marketing, advertising, etc. for Vietnamese enterprises in which the foreign individual is the owner of the goods or is responsible for the costs, service quality, quality of goods delivered to Vietnamese enterprises, or the foreign individual determines the selling price of goods or the price of providing services;
- Foreign individuals through Vietnamese organizations and individuals to negotiate and sign contracts on behalf of foreign individuals;
- Foreign individuals exercise the right to import and export, distribute in the Vietnamese market, purchase goods for export, and sell goods to Vietnamese traders in accordance with the law on commerce.
2.2. Contractor tax rates in Vietnam
Applicable taxes: Clause 2, Article 5, Circular No. 103/2014/TT-BTC stipulates that foreign contractors and foreign subcontractors who are foreign individuals doing business must fulfill VAT obligations according to the guidance of this Circular, personal income tax according to the law on personal income tax and pay VAT and personal income tax according to the percentage method calculated on revenue.
- VAT: VAT is determined by multiplying VAT taxable revenue (x) with tax rate;
- Personal Income Tax: Personal Income Tax is determined by revenue from production and business activities (x) with tax rate.
➤ VAT and personal income tax on business income of non-resident individuals
- The percentage of VAT and personal income tax applied to each industry sector is as follows:
| STT | Business sector | Percentage
to calculate VAT |
Percentage
to calculate personal income tax |
| 1 | Distribution and supply of goods | 2% | 1% |
| 2 | Services, construction without materials | 5% | 5% |
| 3 | Production, transportation, services associated with goods, construction with contracted materials | 3% | 2% |
| 4 | Other business activities | 2% | 2% |
➤ VAT and personal income tax on business income of resident individuals
- Apply the method of calculating tax on each occurrence;
- Applicable principles:
>> For individuals residing and generating business revenue outside the territory of Vietnam, individuals doing business irregularly and without a fixed business location, individuals cooperating in business with organizations in a form where the individual’s business revenue can be determined;
>> For business individuals who pay tax on each occurrence, the revenue level of 100 million VND/year or less to determine whether an individual is not required to pay VAT or personal income tax is the total revenue from business in the calendar year.
- The percentage of VAT and personal income tax applied to each industry sector is as follows:
| STT | Business sector | Percentage
to calculate VAT |
Percentage
to calculate personal income tax |
| 1 | Distribution and supply of goods: | 1% | 0.5% |
| 2 | Services, construction without materials | 5% | 2% |
| 3 | Production, transportation, services associated with goods, construction with contracted materials | 3% | 1.5% |
| 4 | Other business activities | 2% | 1% |
For example:
ABC Company hired Mr. Kenvin (foreign individual) to carry out a consulting project and design interior drawings for ABC Company.
Mr. Kenvin has documents proving that he is a trader recognized by foreign law and Mr. Kenvin came to Vietnam to stay for more than 183 days.
In this case, Mr. Kenvin has documents proving that he is a businessman recognized by foreign law, so he is identified as a business individual and qualifies as a resident individual.
➞ ABC Company is responsible for deducting, declaring and paying VAT and personal income tax for Mr. Kenvin at the contractor tax rate with VAT: rate on revenue is 5%, personal income tax: rate on revenue is 2%.
III. Some questions related to contractor tax
1. Is a foreign organization that signs a service contract to perform outside of Vietnam subject to contractor tax?
In this case, the foreign organization is not subject to contractor tax because there is no income generated in Vietnam.
2. The company has signed a service contract to run ads with Google – Facebook on social networking platforms. So what is the contractor tax rate?
In this case, the company must pay contractor tax on behalf of the foreign partner. The VAT rate is 5% and the CIT rate is 5%.
3. A foreign organization signs a contract to supply machinery and equipment with installation, operation, and testing services. If the contract does not separate the value of machinery and equipment and services, how is contractor tax calculated?
In this case, the company pays contractor tax to foreign partners at the VAT rate of 3% and the CIT rate of 2%.