A new Vietnam law extending VAT to online sales from foreign sellers may come into effect on December 5, 2020, following the publication of an extensive legislative Decree (126/2020/ND-CP). This document contains details of particular interest to foreign online sellers with sales in the South-East Asia country.
The 266-page Decree details VAT (at 10%) compliance measures on sales by foreign online sellers to Vietnam-based consumers.
Back in June 2019, Vietnam adopted the ‘Law on Tax Administration’. Contained within this regulatory update were plans for foreign online sellers to register for Vietnam VAT purposes. These rules were effective from July 1, 2020, however, the publication of this Decree was still required for the law to become enforceable. Now that this Decree is published the new implementation date is that of December 5, 2020.
Vietnam VAT and tax collection mechanisms
Place of consumption rules are already in place, but do not focus on digital services sold online and consumed in Vietnam. A 10% tax known as a Foreign Contractor Tax (FCT) is a mix of 5% VAT and 5% corporate income tax. This FCT tax is currently withheld at source by the Vietnamese party to the contract.
The proposed new collection mechanisms appear to be a mix of voluntary registration by foreign online sellers and VAT collection from financial intermediaries. The FCT, in this case, would be replaced by VAT at a rate of 10% rather than the above split.
The Decree provides a mechanism for foreign sellers of digital services to register for a local Vietnamese tax code, and voluntarily comply with domestic VAT obligations, which they could not previously, without the need for a PE or physical presence in Vietnam. The ultimate aim here is voluntary compliance and remittance. Financial intermediaries would, however, be required to withhold the VAT due on these sales where the foreign sellers do not register voluntarily.
Collection from financial intermediaries will be difficult for the Vietnamese authorities as these intermediaries are separate to the payment card issuers involved in these transactions. The approach here seems to be that a list of foreign entities will be published, similar to lists published by South American tax jurisdictions. This list will allow the Vietnamese government to access information on total transactions by foreign sellers in Vietnam. The government can then use this information to contact foreign sellers and inform them of their compliance obligations.
In parallel to these considerations, a cybersecurity law — that requests the maintenance of data in Vietnam — should also be taken into account as it demands detailed information on transactions in Vietnam. This law is currently making headlines with Apple and Netflix as the main subjects.
Background: currency control issues
Vietnam’s law is unclear as the goal was to place the collection of VAT on all foreign transactions onto local payment providers such as banks and credit card issuers.
The reason the government wants to pursue this approach is that foreign payments are difficult for Vietnamese businesses and individuals to make due to existing currency controls. Personal credit cards, however, are an exception outside of the Vietnamese tax authority's control as cardholders can spend on foreign currency transactions with their cards.
The law had experienced significant resistance from payment providers that stated they do not have sufficient information or systems to cope. It is also the view of payment providers that no legal basis exists to force them to exchange such information with the Vietnamese tax authorities.
It would appear that with this mixed approach, bearing in mind both the to-be-published list of foreign digital service providers and the cybersecurity law, in effect, the Vietnamese authorities wish to encourage voluntary registration for VAT in Vietnam.
We will, of course, keep you up-to-date on developments in Vietnam.
Acknowledgement: With thanks to Matthew Lourey of Acclime Vietnam.
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