Taxation of e-commerce in Vietnam – Part III
The recently introduced taxation of e-commerce in Vietnam has triggered a series of issues. Beside those mentioned in the last two articles on this topic, below are others.
The key trigger is permanent establishment (“PE” i.e., taxable presence in Vietnam). As mentioned in the last two articles on this topic, digital presence may be deemed by tax authorities in Vietnam as physical presence for taxation purposes, especially for e-commerce businesses. Otherwise, it would defeat the purpose of e-commerce taxation, as Vietnam has effective tax treaties with around 80 countries, and many companies doing business in Vietnam are from these countries.
If PE is triggered, it means that foreign companies that have transactions in Vietnam may not be able to rely on a tax treaty to protect the business profits derived through a PE in Vietnam from Vietnamese taxation. Where a tax treaty applies, the PE definition of the relevant tax treaty will prevail. However, when a dispute with the tax authority in Vietnam over PE issues arises, it is often like an uphill battle for taxpayers. Where a tax treaty is not available, a foreign company doing business in Vietnam is even more vulnerable to Vietnam’s taxation if a PE arises, as PE is broadly defined under Vietnam’s domestic tax law. It includes (amongst other things) “an agent delivering goods or services in Vietnam on behalf of its overseas principal.”
When PE is triggered, the business profits of a foreign company are not protected from Vietnamese taxation, and there may also be the following potential tax implications.
1. Potential VAT implication
For example, a foreign company makes consumer products such as mobile phones or fashion apparel in Vietnam through an export-manufacturing arrangement with a manufacturer in Vietnam, and the company also sells its products online directly to Vietnamese consumers through its website or other e-commerce platforms. Normally, the export-manufacturing fees charged by the local manufacturer enjoy 0% VAT for export-manufacturing services, so the foreign company does not suffer a 10% VAT which would otherwise be charged by a service provider in Vietnam.
However, according to Vietnam’s current VAT regulation, if the services are rendered under a contract between a Vietnamese service provider and PE in Vietnam of a foreign company, then the 0% VAT rate will only apply if the services are performed outside Vietnam. In export-manufacturing, the services are obviously performed in Vietnam, so the manufacturing fees will be taxable at 10% VAT, if the foreign company is found to have a PE in Vietnam.
2. Potential foreign contractor tax implication
Another example is where a service is provided by a foreign contractor, to a Vietnamese customer, and it is performed outside Vietnam (known as offshore service). Such service may be exempt from the foreign contractor withholding tax (including 5% VAT and 5% corporate income tax), if it is “consumed” outside Vietnam, and if the foreign contractor does not have a PE in Vietnam. As an illustration, a foreign company provides conventional (i.e., offline rather than online) advertising or marketing services to a Vietnamese customer, to promote made-in-Vietnam products (whether they are made by a foreign owned company or a local company) in international markets, and the services are performed outside Vietnam. These services are exempt from the foreign contractor withholding tax. However, if they are provided as online services then they will be taxable, and so will it be the case if the foreign contractor has a PE in Vietnam.
3. Potential personal income tax implication
For business visitors to Vietnam who spend less than the aggregate of 183 days in Vietnam in a tax year, they are considered as non-residents, and they may apply for tax protection under a tax treaty. Most tax treaties with Vietnam provide that if the person’s remuneration is not borne by a PE in Vietnam then the person’s employment income will not be taxable in Vietnam.
However, in the case scenario (1) above, if the foreign company has a Representative Office in Vietnam which employs (just pays for the cost of) a non-resident expatriate executive (e.g., a regional procurement manager) who frequently visits Vietnam to conclude contracts with the company’s contract manufacturers. The Representative Office itself does not constitute a PE in Vietnam under Vietnam’s current tax regulation. However, if the company is found to have a PE, either under the case scenario (1) above because of its e-commerce activities in Vietnam, or because of certain activities undertaken by the Representative Office or by the non-resident executive, then the person may not be protected by the relevant tax treaty.
A foreign company may be found to have a PE in Vietnam in different ways and it may have more than one PEs in Vietnam. Vietnam’s current tax legislation is silent as to whether if a business is found to have a PE in Vietnam, then above tax treatments will only apply to the transactions associated with such a PE, or they will apply to all transactions. So, the risk of the latter exists, even if a transaction is not associated with the PE.
4. Potentially higher tax implication to PEs
Normally, if a PE is found then only the business profits derived from such a PE (if any) is taxable in Vietnam. However, under the current tax administration rules, Vietnam taxes the business profits of a foreign company that are derived through a PE in Vietnam primarily through the withholding tax regime, whereby a PE’s tax liability is based the contract value (i.e., revenue), instead of profits. For example, a PE is taxed at 1% corporate income tax and 1% VAT on of its trading revenue, or 5% corporate come tax and 5% VAT on its service revenue etc.
However, the foreign contractor tax regulation allows a foreign contractor to select the option of paying corporate income tax at 20% of profits (i.e., revenue – expenses), subject to successful tax registration as if the PE were an ordinary registered business in Vietnam. It means that the tax office may attempt to tax a PE at 20% corporate income tax on profits, instead of at a lower rate (1% or 5%) on the revenue. In this case, the tax on the business profits derived through the PE may be higher than 20% of the real business profits, because chances are that the foreign company may not be able to substantiate all its overseas expenditures (e.g., administration or management expenses) allocated to the PE for tax deductions. Vietnam has very strict rules on expense substantiation for tax deductions, and the tax regulation limits a foreign company’s allocation of management expenses to its PE in Vietnam by applying the following formula
|Cap on tax deductions of the management expenses allocated to the PE in Vietnam||=||
Revenue of the PE in Vietnam
|X||Total global management expenses|
However, the tax regulation also states that no tax deduction is permissible where a PE in Vietnam does not maintain adequate bookkeeping according to Vietnamese accounting standards, which may be the case for a foreign company that is found to have a PE in Vietnam by accident.
Therefore, international businesses that intend to further penetrate Vietnam’s market through e-commerce should be mindful of the higher PE risk, and the above potential additional tax implications.
If you have missed the last two articles on this topic and would like to read them, you may click here to view the first article and click here to view the second article. The author can be contacted at email@example.com.