Understanding Vietnam Tax System (2024 Update)

When starting a business in Vietnam, it’s crucial to grasp the intricacies of the country’s tax system, as it can significantly influence your business operations.

This article is designed to offer valuable insights to assist you in navigating Vietnam’s dynamic business environment more efficiently.

Overview of Vietnam tax system

The Vietnam Tax System encompasses a range of taxes that most companies and foreign investors operating in the country are obligated to comply with.

The major taxes in Vietnam consist of the following types:

• Corporate income tax
• Foreign Contractor Withholding Tax
• Capital Assignment Profits Tax
• Value-added tax
• Special Sale Tax
• Property taxes
• Natural resources tax
• Environment protection tax
• Import and export duties
• Vietnam Personal Income Taxes
• And so on.

To help you understand Vietnam’s tax system better, we will go into detail about each of the categories below.

Corporate income tax

In Vietnam, Corporate Income Tax (CIT) is a mandatory tax applied to the earnings of companies and businesses operating within the country.

Tax rate

The standard corporate income tax rate in Vietnam is 20%, which applies to the majority of businesses.

However, there are certain situations in which tax rates can vary, either higher or lower, depending on specific industries and sectors.

For example, industries like oil, gas, and other extractive sectors may be subject to tax rates ranging from 32% to 50%.

For small and medium-sized enterprises (SMEs), there are opportunities for preferential or reduced tax rates in various industries, including:

High-tech and software development

• Education
• Healthcare
• Environmental protection
• Scientific research
• Agricultural and aquatic product processing
• Renewable energy
• Infrastructure development

These industries may qualify for special tax rates and incentives, making them attractive options for investment and business development in Vietnam.

CIT calculation formula

The calculation of CIT involves 3 steps below:

Step 1: Determine taxable income

Start by calculating your company’s taxable income, which is based on the profit earned during the tax period (usually a fiscal year). The formula is as follows:

Taxable Income = Total revenue – Deductible expenses – Deductions

In which:

• Total revenue includes all income generated by the business, such as sales revenue, interest income, rental income, and other forms of revenue.
• Deductible expenses are legitimate business expenses that can be deducted from the total revenue. Common allowable expenses include costs related to production, salaries and wages, rent, utilities, and depreciation.
• Deductions your business may qualify for based on specific industries, regions, or projects.

Step 2: Determine applicable tax rate

The standard corporate income tax rate in Vietnam is typically 20%. However, as mentioned earlier, certain enterprises may be eligible for lower tax rates or tax incentives based on government policies and industry type.

Step 3: Calculate the tax liability

To calculate the CIT liability, you can use the formula as follows:

CIT liability = Applicable tax rate x Taxable Income

Foreign Contractor Withholding Tax (FCWT)

FCWT applies to foreign organizations or individuals who operate a business or earn income in Vietnam based on a contract or an agreement with a Vietnamese party (as a main foreign contractor) or another foreign contractor to implement a part of the contractual scope of works (a foreign subcontractor).

Vietnam Foreign Contractor Tax comprises both Corporate Income Tax (CIT) and Value Added Tax (VAT), but in some cases, may also include Profits Income Tax.

Scope of application

FCWT applies to a broad range of income types, including various financial transactions and business activities. These income categories subject to FCWT in Vietnam include:

• Services: This includes income generated from services provided or consumed within Vietnam.
• Goods: FCWT is applicable to income derived from the supply of goods that may be accompanied by related services or when the delivery point for goods is within Vietnam.
• Other income categories: FCWT is also applicable to various other income sources, such as:
  • Construction and Installation
  • Interest
  • Royalties
  • Trademarks
  • Penalty/ Compensation
  • Income from transportation activities
  • Securities transfer

FCWT declaration methods

There are three methods for the FCWT declaration including the Deemed method, Hybrid method, and Declaration method.

• Deemed or direct method: This is the most commonly used method for FCWT declaration. Under this method, FCWT is withheld at the source by the Vietnamese entity making payments to foreign contractors at prescribed rates. Importantly, this method does not require any specific conditions to be met by the foreign recipient of the income.
• Declaration method: To utilize this method, foreign organizations are required to register for VAT in Vietnam and follow the same VAT and CIT filing procedures as local businesses. Essentially, foreign organizations are treated similarly to domestic ones in terms of tax compliance.
• Hybrid method: The hybrid method allows foreign organizations to register for VAT in Vietnam and adhere to the same VAT filing procedures as local entities. However, for CIT purposes, they calculate and pay taxes based on the Deemed Method rates, which are determined by gross turnover.

The Hybrid method and Declaration method require foreign contractors to satisfy the following conditions:

• Maintaining a contract duration of 183 days or more
• Having a Permanent Establishment (PE) in Vietnam, (e.g a Project Office) and
• Applying the Vietnamese Accounting System

Double Taxation Agreements (DTAs) effect on FCWT

DTAs can significantly influence the application of FCWT. In cases where a foreign contractor’s income originates from a country that has a DTA with Vietnam and the contractor does not have a Permanent Establishment (PE) in Vietnam, it may be possible to avoid income tax.

In simpler terms, DTAs play a crucial role in preventing double taxation through two main mechanisms: tax exemption or reduction and the availability of foreign tax credits. Up to the present time, Vietnam has established nearly 80 DTAs with numerous trading partners, further enhancing its tax treaty network.

Value-added tax (VAT)

Value-Added Tax (VAT) in Vietnam is a consumption tax that is imposed on the value added to goods and services at each stage of their production or distribution. VAT is a significant source of revenue for the Vietnamese government and is applied to a wide range of goods and services.

VAT is imposed on both domestically produced and imported goods and services, irrespective of whether they are intended for production, trade, consumption, or any other purpose. The tax rates vary depending on the type of goods or services:

• Exported goods and services and international transportation are zero-rated (subject to 0% VAT)
• Essential goods and services, as well as specific categories of goods and services as defined by regulations, are taxed at a 5% VAT rate.
• For Standard rate for goods and services: 10%
• The standard VAT rate for most goods and services is set at 10%.
• Certain goods and services, as specified by relevant regulations, are exempted from VAT entirely.

Zero-rated vs VAT-exempted goods and services

In Vietnam, there are distinctions between zero-rated goods and services and those that are exempt from VAT.

• Zero-rated goods and services are not subject to VAT when they are sold to customers. Businesses that deal with zero-rated goods and services can claim a credit for the VAT they have paid on their inputs from the government (e.g., purchases, expenses, and costs related to producing these goods and services).
• VAT-exempted goods and services: Similar to zero-rated items, the government does not impose VAT on the sale of exempt goods and services. However, the key difference is that businesses cannot offset the VAT they paid on inputs against their VAT liability.

VAT calculation methods

There are two calculation methods:

• Deduction method: applicable to business establishments maintaining accounts, invoices, and documents in accordance.
• Direct method: applies to business establishments with annual revenue subject to VAT of less than VND1 billion; individuals or business households; businesses engaging in gold, silver, and precious stones trading.

Special Sale Tax (SST)

SST applies to the manufacturing or import of certain goods and the provision of certain services.

Tax credits

Whereas a good is subject to SST and is manufactured with raw materials that were also subject to SST, the manufacturer can claim credit for the SST on those raw materials. The same goes for importation where the taxpayer has to pay for SST on both the selling price and importation.

Tax rate and Applicable goods and services

Goods and Services	Tax rate (%)
Cigar and Cigarettes	75%
Spirit and Wine	35%-65%
Beer	65%
Automobiles with less than 24 seats	10%-15%
Motorcycle (above 125cm3)	20%
Airplanes	30%
Boats	30%
Petrol	7%-10%
Air-con (no more than 90,000 BTU)	10%
Playing cards	40%
Votive papers	70%
Discotheques	40%
Massage, Karaoke	30%
Casinos, jackpot games	35%
Entertainment involved betting	30%
Golf	20%
Lotteries	15%

Please note that a reduction in the excise tax on electric vehicles was enacted by the National Assembly in March. The tax rate on battery-powered electric cars with 9 seats or less will be 3% from March 1, 2022, to February 28, 2027 (reduced from 15% rate).

Tax rates will increase to 11% after March 2027.

Import and export duties

Import and export duties are taxes imposed by the Vietnamese government on the importation and exportation of goods between the domestic market and non-tariff zones.

Certain items are exempted from the standard import/export duty regulations, including:

• Goods in transit: Goods passing through Vietnam en route to another destination without being intended for domestic consumption are exempt from import/export duties.
• Items exported from non-tariff zones to foreign countries: When products are sent from non-tariff zones in Vietnam to foreign countries, they are not subject to standard import/export duties.
• Goods imported into non-tariff areas for exclusive use: Items brought into non-tariff zones from foreign nations for exclusive use within those zones are not subjected to import/export duties.
• Items transferred between non-tariff zones: Goods moved between different non-tariff zones within Vietnam are exempt from standard import/export duty regulations.

Import duties

Import duties in Vietnam refer to the taxes and fees imposed by the Vietnamese government on goods and products that are imported into the country. These import duties comprise various types of fees, including customs duties, value-added tax (VAT), and special consumption tax (SCT).

The rates of import duties can vary based on the nature of the product, its value, and its origin sources (whether it’s from a country with which Vietnam has a free trade agreement or not). Import duty rates in Vietnam are categorized into three main groups

• Ordinary rates: Applicable to goods not eligible for preferential or special preferential rates.
• Preferential rates: Applicable to goods originating from countries that have a most-favored-nation (MFN) status with Vietnam.
• Special preferential rates: Applicable to goods imported from countries that have entered into a free trade agreement (FTA) with Vietnam.

Export duties

Most goods and services intended for export from Vietnam are exempt from taxes. Export duties are imposed on a limited set of items and can range from zero percent to 45 percent. These duties are calculated based on the free-on-board (FOB) price of the goods.

Export duties are primarily levied on natural resources, including minerals, forest products, and scrap metal. Most other export items are not subject to export duties, but it’s essential for businesses engaged in international trade to verify the specific regulations and exemptions relevant to their products.

Vietnam Personal Income Taxes (PIT)

Vietnam Personal Income Tax (PIT) is a tax imposed on the income earned by individuals and entities in Vietnam.

Tax residency

Tax residency determines who is subject to PIT in Vietnam. If you are a tax resident, you are obligated to pay PIT on your worldwide income. On the other hand, non-tax residents are only taxed on the income they earn within Vietnam.

An individual is considered a tax resident if they meet one of the following conditions:

• They have lived in Vietnam for at least 183 days during a 12-month period; or
• They have a permanent establishment or a significant presence in the country for tax purposes.

Tax year

In Vietnam, the tax year coincides with the calendar year, running from January 1st to December 31st. However, for individuals who spend less than 183 days in Vietnam during a given year, their tax year will extend for 12 months from the date of their arrival in the country.

Tax rates on employment income

Tax rates for employment income in Vietnam differ based on residency status and income type.

For tax residents, the PIT follows a progressive scale, ranging from 5% to 35%. As one’s employment income increases, the tax rates also increase accordingly. Business income, on the other hand, is subject to varying tax rates based on the specific type of income.

Non-tax residents, however, face a flat rate of 20% on their employment income, with different rates applying to various categories of business income.

Taxable employment income includes all forms of compensation and benefits, except for expenses related to business trips, telephone charges, stationery costs, office attire, overtime premiums, and similar items.

Non-employment income subject to taxation comprises business income, investment income, proceeds from the sale of shares, gains from real estate transactions, and similar sources of income.

Non-taxable Income

Non-taxable income includes but is not limited to the following:

• Interest income comes from credit institutions or banks, compensation from life, or non-life insurance policies
• Retirement pensions from Social Insurance Law (or equivalent)
• Income from direct family members as properties, inheritances, gifts
• And so forth.

Capital Assignment Profits Tax (CAPT)

CAPT is not a standalone tax; it is a portion of the corporate income tax that results from the sale of shares in a Vietnamese company. It represents the profit generated from these share sales.

CAPT is calculated by subtracting the associated costs and transfer expenses from the profit obtained through the sale of shares.

Foreign entities involved in the transfer of securities, such as bonds or shares in a listed joint-stock company, may be subject to a specific tax rate of 0.1%. This rate is applied to the entire sales proceeds of these securities.

Property taxes

Property tax in Vietnam is a type of tax imposed on individuals or organizations who own real estate properties, including land and buildings. This tax is applicable to both Vietnamese citizens and foreigners who own properties in the country.

The rules governing property tax are consistent for both Vietnamese and foreign property owners, and it is collected by local authorities in accordance with the Land Law and other relevant Vietnamese regulations.

Here are some key points about property tax in Vietnam:

• Taxable properties: Property tax covers various types of real estate, such as residential houses, apartments, commercial buildings, agricultural land, and non-agricultural land.
• Taxpayer responsibility: Property owners are responsible for paying property tax to local tax authorities. It is essential for property owners to register properties and meet tax obligations.
• Tax rate: Property tax rates in Vietnam can vary based on factors like the property’s location, type, and intended use. Local government authorities determine these rates, and they may change over time. Generally, residential properties tend to have lower tax rates compared to commercial or industrial properties.

Natural resources tax (NRT)

Natural resources tax (NRT) in Vietnam is imposed on industries that exploit and utilize the country’s natural resources. It is applied to various sectors and activities involving the extraction or utilization of natural resources, including but not limited to petroleum, minerals, natural gas, forestry products, and natural water.

The tax rates for NRT vary depending on the type of natural resource being exploited, with rates ranging from 1% to 40%. These tax rates are applied to the production output at a specified taxable value per unit.

Additionally, there are exemptions for certain uses of natural water, such as for agriculture, forestry, fisheries, salt industries, and cooling purposes, provided that specific conditions are met. It’s worth noting that crude oil, natural gas, and coal gas are subject to progressive tax rates based on the daily average production output.

Environment protection tax (EPT)

The Environment Protection Tax (EPT) in Vietnam is a tax imposed on activities that are known to have a negative impact on the environment including the production and import of goods that are deemed environmentally harmful, such as fossil fuels (e.g., gasoline, diesel, and coal), plastics, chemicals, and luxury goods that have a significant environmental impact.

The primary purpose of this EPT is to encourage businesses and individuals to reduce environmental footprint by taxing activities that generate pollution or consume natural resources.

The tax rates vary depending on the type of activity and the environmental impact of the product. For example, higher tax rates are applied to products with greater pollution potential.

Transfer pricing in Vietnam

Transfer pricing in Vietnam refers to the practice of determining the prices at which goods, services, or intellectual property are exchanged between related entities, typically within a multinational corporation or group of companies.

The main objective of transfer pricing regulations in Vietnam, as in many other countries, is to ensure that transactions between related parties are conducted at arm’s length prices, meaning prices that would be charged between unrelated parties in an open market.

Vietnam’s Transfer Pricing is based mostly on the Transfer Pricing Guidelines of the Organization for Economic Cooperation and Development (OECD) and Base Erosion and Profit Shifting (BEPS) Action Plan. The rules are also applied to domestic-related transactions.

Related parties

Transfer pricing applies to transactions between entities that are considered related parties. This often involves companies within the same group of companies where one entity may be in Vietnam, and the other could be in another country.

Related parties typically have a significant level of common ownership or control, often defined as 25% or more.

Arm’s length principle

The core principle of transfer pricing is to ensure that the prices set for transactions between related parties are consistent with what would be charged between unrelated parties under similar circumstances. This principle is crucial in preventing profit shifting and tax avoidance.

Documentation requirement

Entities engaged in related-party transactions in Vietnam are required to maintain detailed documentation supporting the prices they use in those transactions.

This documentation is crucial to demonstrate compliance with the arm’s length principle and may include financial data, comparable transactions, and other relevant information.

Transfer pricing documentation follows a three-tiered structure:

• Master file
• Local file
• Country-by-country report

Transfer pricing exemption

Entities are exempt from disclosing transfer pricing information if they meet all of the following criteria:

• Engage in transactions involving Vietnamese parties.
• Are subject to the same corporate tax rate.
• Neither party is eligible for tax incentives during a specific tax period.

In certain cases, entities are required to declare transfer pricing information but are not obligated to provide documentation if they fall into one of the following categories:

• Gross revenue is less than VND 50 billion (approximately $2 million), and all related-party transactions do not exceed VND 30 billion (approximately $1.2 million).
• They have entered into an Advance Pricing Agreement (APA) and are submitting an annual report for APA purposes.
• They have no revenue/expenses related to intangible assets, gross revenue is less than VND 200 million (approximately $8 million), and their operating profits before interest and taxes exceed prescribed rates for specific sectors.

Double Taxation Agreements (DTAs)

Double Taxation Agreements (DTAs), also known as Tax Treaties, are bilateral agreements between two countries that are designed to prevent double taxation of income for individuals and businesses that operate in both countries.

Vietnam has entered into more than 80 DTAs to promote international trade and investment.

• Reduction of withholding taxes: DTAs often reduce or eliminate withholding taxes on cross-border payments. For example, if a Vietnamese company pays dividends to a foreign shareholder in a country with which Vietnam has a DTA, the treaty may reduce the withholding tax rate or exempt the payment from withholding tax altogether.
• Exchange of information: DTAs often include provisions for the exchange of tax-related information between the tax authorities of the two countries. This helps ensure compliance and prevent tax evasion.
• Permanent Establishment (PE): DTAs often define what constitutes a permanent establishment in the other country. This is important for determining whether a business has a taxable presence in the foreign country and how its income should be taxed.

Conclusion

The information provided above offers a broad overview of the Vietnam tax system, based on the current taxation regulations and practices in the country. If you need a more in-depth understanding of tax-related matters in Vietnam, please feel free to contact us at service@bbcincorp.com or engage in a live chat with our support team.

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