According to Vietnam E-commerce Association (VECOM)’s 2021 report, Vietnam’s e-commerce sector grows 30% annually with USD13.2 billion revenue in 2020, which is expected to reach USD52 billion in 2025. Last year, online retails increased by 46%, ride-hailing and deliveries increased by 34%, online marketing and entertainment increased by 18% etc. On the average, there are over 3.5 million online transactions per day, 80% of which are cash-on-delivery transactions.
Understandably, tax authorities in Vietnam are stepping up measures to claim their shares of tax collection in this fast-growing sector. They have been introducing rules targeting different stakeholders including local and international e-commerce suppliers, digital service providers and e-platform operators. The new rules also require local banks, payment intermediaries, and consumers to assist tax authorities by withholding taxes, filing tax returns and paying taxes on behalf of targeted taxpayers, or identifying and reporting delinquent taxpayers.
So, whether you are a supplier, intermediary service provider, or end-consumer, it is important to know the new rules and be prepared before the tax authorities might come after you or your business.
This article looks at what may be required of you or your business, whether as a seller, a buyer or an intermediary.
Prior to 1 July 2020 (i.e., before the introduction of the rules on taxation of e-commerce), the key taxation rules already existed, but they were not expressly directed to e-commerce transactions. In essence, unless a business had already been registered for taxation (which is often the case of most local businesses) foreign suppliers or service providers (known as “foreign contractors”) who had transactions with customers in Vietnam were required to pay, foreign contractor tax through, withholding by their customers in Vietnam.
However, there was no obligation imposed on intermediary service providers such as banks, payment service providers, logistics providers, and customers who acquired goods or services for personal use. In practice, there were requirements that when acquiring goods or services from a foreign supplier, a business (rather than individual) customer in Vietnam was required to withhold the foreign contractor tax, file a tax return and remit the taxes withheld to the tax office on behalf of the foreign supplier. Individuals doing business by supplying goods or services were also required to register for taxation and pay the applicable taxes including VAT and personal income tax (PIT) on their business income. The rules are as follow:
- For goods or services supplied by a local supplier – If the supplier is a business, then in most cases the business is already registered and paying tax under the normal tax regime. So, the buyer has no tax withholding or reporting obligation. If the supplier is an individual, then he or she must register for taxation and pay tax if he or she earns a total turnover above VND100 million/year. The tax rates are 0%-5% VAT and 0.5%-5% PIT, depending on the types of goods/services. For example, 1% VAT and 0.5% PIT for trading; 5% VAT and 2% PIT for services; 3% VAT and 1.5% PIT for logistics and catering services etc.
- For goods or services supplied by a foreign contractor – Unless the supplier is already registered for taxation, if the goods or services are required for business purposes, the buyer is required to the withhold foreign contractor tax, which normally comprises of 1% VAT and 1% corporate income tax (CIT) for goods, or 5% VAT and 5% CIT for services, from each payment made to the foreign supplier. This requirement does not apply to an individual acquiring goods or services for personal use.
In both cases, the tax rates are flat rates which are applied directly to the turnover. In the second case, if the goods tittle passes outside Vietnam then it is considered as a trading-WITH-Vietnam transaction which is exempt from the foreign contractor tax, as opposed to a trading-IN-Vietnam transaction which is taxable. Cash-on-delivery transactions and the supply of goods that includes services (other than warranty) are considered as trading-In-Vietnam. For some services, if they are performed and consumed outside of Vietnam, they may be exempt from the foreign contractor tax. However, it is currently unclear whether these exemptions will continue to apply to e-commerce transactions.
Also, technically a foreign supplier may apply for tax treaty exemption of the 1% CIT where a tax treaty applies and if the supplier does not have a permanent establishment (or taxable presence) in Vietnam. It is also unclear whether the same rule will apply to foreign e-commerce suppliers, given that there are many uncertainties surrounding permanent establishment issues, for example, whether digital business presence is equal to physical business presence in Vietnam etc. As for VAT, if import VAT is already paid when the goods are imported, then the 1% VAT is technically exempt.
Effective 1 July 2020, the rules are summarised as below:
- The tax rates remain the same, but some tax treatments may be different (for example, trading-IN-Vietnam vs trading-WITH-Vietnam, permanent establishment issues etc.);
- If the foreign supplier and the local buyer agree on the tax withholding arrangement as in (2) above, then the foreign supplier is not required to do any thing unless it opts to register for taxation in Vietnam and pay taxes directly by itself;
- If for any reason that the tax withholding arrangement, as in (2), does not work, then the foreign supplier is required to register for taxation in Vietnam (which was previously optional but has now become a requirement). This requirement applies regardless of whether the local buyer is a business or an individual. A foreign supplier may elect to register for taxation in Vietnam directly in its name, or thru a local agent such as a distributor, a tax agent, or a bank or payment intermediary which the supplier regularly does banking with;
- If the foreign supplier is not registered for taxation in Vietnam or cannot prove that it is paying taxes in Vietnam thru any agent, then business buyer is automatically required to withhold taxes, file a tax return and remit the taxes withheld to the tax office, as described in (2) above;
- The same as above but if the buyer is an individual then the local bank or payment intermediary is required to do so. If they are unable to do so, the individual making the payments thru a bank or payment intermediary (such as credit cards, e-wallets etc.) may be required to report the transactions to the national tax authority every month. The national tax authority may then identify the supplier, discloses publicly its name and website, and require the local bank or payment intermediary to identify the supplier’s bank accounts for tax withholding.
So far, the above new mechanism appears not to target logistics providers. However, given 80% of e-commerce transactions in Vietnam are currently on cash-on-delivery terms, it would not be a surprise if the tax authorities introduce further rules that may require logistics providers (and other stakeholders) to follow suit.
Tax planning tips for foreign suppliers
If you are a foreign supplier, you may consider the following:
- If possible, contractually pass the foreign contractor tax responsibility to the local buyer (by quoting your prices as net of all Vietnam’s taxes), or at least pass the VAT to the local buyer. Normally, as a VAT-registered business buyer can claim the VAT paid for its foreign contractor as its input VAT credit, so the VAT will not be a cost to any party;
- Make sure which transactions are trading-IN-Vietnam (taxable) and which are trading-WITH-Vietnam (non-taxable). If in doubts, seek an advance tax ruling from the tax authority;
- Make sure that if there are any services other than warranties to be provided to a local buyer, they should not be provided together with the supply of goods, to claim the latter as a trading-WITH-Vietnam transaction;
- Watch out for potential permanent establishment issues and search for tax treaty relief;
- Register for taxation, and pay the foreign contractor tax where it is not withheld by your local buyer or intermediary.
Tax planning tips for local buyers
If you are a local buyer, the following questions should be checked and cleared:
- Is the supplier/e-platform provider in Vietnam or overseas?
- Are they registered businesses in Vietnam and/or registered for taxation in Vietnam? – This can be quickly checked online at the National Business Registration Portal or the General Department of Taxation’s website.
- Are you paying directly to the supplier or thru the e-platform provider?
- Is the supplier’s bank or payment intermediary registered for withholding the supplier’s taxes?
- Are you required/allowed to withhold the supplier’s taxes or report the transactions to the tax office?
- Who is going to provide you a tax invoice, the supplier or the e-platform provider?
- If you are buying for your business in your own name, does your company have a written policy or instruction allowing you to do so? if not, your company may not be allowed a tax deduction, for any expense more than VND200,000 (~USD8.8).
As the rules are new, there will be likely different interpretations that could lead to practical issues. Kreston NNC’s tax professionals are at the forefront of this new area of taxation in Vietnam. Our team has extensive hands-on experience in helping clients, ranging from start-up businesses to large corporations in Vietnam. If your business needs professional support in this area, please contact us.