Foreign Contractor Tax (FCT) is a tax regime in Vietnam that applies to foreign organizations and individuals (referred to as “foreign contractors”) who do not have a permanent establishment in Vietnam but earn income from providing services, supplying goods, or conducting business activities in Vietnam. The FCT combines both Value-Added Tax (VAT) and Corporate Income Tax (CIT) obligations for these foreign entities. The FCT is commonly applied to foreign contractors operating in sectors such as construction, telecommunications, digital services, and e-commerce.
Components of FCT
- Value-Added Tax (VAT):
VAT under FCT is imposed on the supply of goods and services by foreign contractors to Vietnamese businesses or consumers. It is intended to capture the value added to goods or services provided in Vietnam. - Corporate Income Tax (CIT):
CIT under FCT is levied on the income earned by foreign contractors from conducting business in Vietnam. It is applied to the gross revenue that the foreign contractor earns in connection with the provision of goods, services, or other business activities.
How FCT is Calculated
The Foreign Contractor Tax is calculated using one of the following methods, depending on the nature of the contract and the foreign contractor’s choice:
1. Deduction Method
This method allows the foreign contractor to declare VAT and CIT in the same way as local Vietnamese companies:
- VAT: Foreign contractors must apply the standard VAT rate (usually 10%) on their sales in Vietnam. They can also deduct input VAT (VAT paid on purchases made in Vietnam).
- CIT: Corporate income tax is calculated based on the net profit, with the CIT rate for businesses in Vietnam currently set at 20% of taxable income.
This method is generally used by foreign contractors who have a long-term presence or contracts in Vietnam and wish to offset input VAT against output VAT.
2. Direct Method (Deemed Method)
The direct method is more commonly used by foreign contractors, especially those without a permanent establishment in Vietnam. It involves calculating VAT and CIT based on a percentage of gross revenue. The tax rates vary depending on the nature of the goods or services provided:
- VAT Rates (on gross revenue):
- Goods: 1%
- Services: 5%
- Mixed contracts (goods and services): Typically 3%, depending on the nature of the contract.
- CIT Rates (on gross revenue):
- Trading goods: 1%
- Services (including consulting, advertising, etc.): 5%
- Construction (with or without supply of materials): 2% to 3%
- Royalties: 10%
- Interest: 5%
3. Hybrid Method
The hybrid method allows the foreign contractor to pay VAT using the deduction method, while CIT is paid using the direct method. This is used in cases where the contractor wishes to benefit from VAT input deductions but prefers the simpler direct method for CIT.
Who Pays FCT?
FCT can either be paid by the foreign contractor or withheld by the Vietnamese party (the company or entity in Vietnam that is contracting the foreign entity). If the foreign contractor does not register for tax directly, the Vietnamese party is responsible for withholding the FCT from payments made to the foreign contractor and remitting it to the Vietnamese tax authorities.
Key Points of FCT
- Scope: FCT applies to foreign contractors that engage in activities such as providing goods and services, leasing equipment, licensing software, consulting, and other business activities in Vietnam.
- Registration: Foreign contractors can either register for tax in Vietnam or have their Vietnamese counterpart withhold and pay taxes on their behalf.
- Tax Declaration: FCT is declared and paid on a monthly or quarterly basis, depending on the nature of the contract and the volume of revenue generated.
Impact on E-commerce and Digital Services
For foreign e-commerce companies or digital service providers (like tech giants) that provide online services, digital content, or cloud services to customers in Vietnam, FCT ensures that they are taxed on the income earned from Vietnamese customers. The VAT and CIT rates applied under FCT provide a straightforward mechanism to capture tax revenue from foreign companies that do not have a physical presence in Vietnam.
Summary
In summary, Foreign Contractor Tax (FCT) is Vietnam’s tax mechanism designed to ensure that foreign businesses contribute taxes on the income they generate in Vietnam, especially in industries like e-commerce, services, and construction. It simplifies tax compliance for foreign entities while ensuring that the Vietnamese government collects revenue from cross-border business activities.
This is one of several key taxes in Vietnam foreign firms should be aware of. Other important taxes in Vietnam include Vietnam’s Value-added Tax, Special Consumption Tax, Corporate Income Tax, Capital Gains Tax, and Personal Income Tax. By familiarising themselves with these taxes it may foreign firms to avoid running afoul of Vietnam’s tax department.
With this in mind, foreign firms can also keep track of changes to tax rules and regulations by making sure to subscribe to the-shiv.