Vietnam: Tax exposure of the permanent establishment (PE)
According to Article 2 (1) (b) Law on Corporate Income Tax (CIT) a foreign enterprise (FE) is subject to CIT in Vietnam “with or without a permanent establishment in Vietnam.”
Article 2 (2) specifies:
“(b) A foreign enterprise with a permanent establishment in Vietnam must pay tax on taxable income arising in Vietnam and on taxable income arising outside Vietnam and relating to the operation of such permanent establishment.
(c) A foreign enterprise with a permanent establishment in Vietnam must pay tax on taxable income arising in Vietnam and not relating to the operation of the permanent establishment.
(d) A foreign enterprise that does not have a permanent establishment in Vietnam must pay tax on taxable income arising in Vietnam.”
Many of these activities of a FE are covered by the regime of the foreign contractor withholding tax (FCWT). The practical handling of the FCWT and the exemptions under the relevant double taxation agreement (DTA) are well established. If the contracts are prepared properly, the tax exposure is not high and most of the administrative procedures must be fulfilled by the Vietnamese partner.
Questionable is the tax exposure in cases where the FE has established a permanent establishment (PE) in Vietnam and that PE has income arising in Vietnam or outside Vietnam relating to the PE or the FE has income in Vietnam not related to the PE if this income is not matching the conditions of the FCWT. This will be the case if the income is not paid by an entity registered in Vietnam. If the PE is involved in a contract between the FE and a customer in a third country, this income is subject to CIT in Vietnam.
From our experience, not so few foreign companies with a presence in Vietnam are using this presence which can take the form of a rep. office or a subsidiary or other forms for operating the regional business. In the case of Bayer Vietnam Company Limited, the general department of taxation has decided in the official letter 1934/TCT-HTQT that even though it is a separate legal entity registered in Vietnam, the subsidiary constituted a PE of Bayer Hong Kong because of the way the subsidiary has been managed. All cases where the subsidiary is effectively managed by a foreign group company should therefore be analysed in detail.
Contrary to a widespread expectation, the FCWT regime will not be applied accordingly in these cases. The normal tax rate of 20% on the profit will be applied. Difficulties arise where the PE does not fulfill accounting in compliance with the regulations of Vietnam.
The Ministry of Finance tax department has instructed a local tax department in the official letter 3896/TCT-HTQT regarding the case of a PE having taxable income for which the FCWT is not applicable. The principles are:
→ The income of the FE is defined by the difference between revenue and expenses allocated to operations in Vietnam on the basis of the contracts and accounting books of FE.
→ If that is not possible, the ratio between the costs allocated to the operation in Vietnam and the total cost of the contract shall be used to determine the revenue.
→ If the FE cannot prove the relevant facts, the CIT will be charged on the revenue of the entire contract.
The local tax authorities are encouraged to enforce this tax obligation. FE operating in Vietnam should check their exposure.
For the latest global international corporate tax developments from all over the world, please see: Global International Corporate Tax Newsletter #1/2022