New Foreign Contractor Tax regulations – significant extensions in scope

The Foreign Contractor Tax (“FCT”) is the principal mechanism by which
Vietnam taxes foreign companies carrying out activities here, or
otherwise deriving income. It is withheld from payments made to such
foreign companies by their Vietnamese customers and contracting parties.
As such it is a very important tax for foreign companies doing business
here, their Vietnamese counterparts and the State.

The Ministry of Finance has just issued the new FCT Circular 103/2014/TT- BTC,
replacing the previous FCT Circular 60/2012. Circular 103 will be
effective from 1 October 2014. Some notable points include:

1. Expanded scope of application

The scope of application has been expanded to cover the following cases:

•There is a move to tax certain distribution arrangements where foreign
entities sell goods into Vietnam. Foreign entities involved in the
distribution of goods or provision of services in Vietnam, whereby the
foreign entities retain ownership of the goods, bear distribution,
advertising or marketing costs, are responsible for the quality of goods
or services, make pricing decisions, or authorise/hire other Vietnamese
entities to carry out part of the distribution of goods/provision of
services in Vietnam will now be within the scope of the FCT.

This is potentially a very substantial extension in the scope of the FCT,
and appears to apply not only to agency arrangements (i.e. where foreign
entity retains ownership of the goods), but also distribution
arrangements where foreign entity retains some control over the supply
chain within Vietnam. Such arrangements are quite common in Vietnam so
the implications of these new rules will need to be assessed.

•Foreign entities distributing goods in Vietnam or supplying goods under
Incoterms where the foreign seller bears the risks of delivery of the
goods within Vietnam. The previous FCT Circular specifically referred to
Incoterms (DDP, DAT, DAP) which would result in FCT applying to a goods
supply contract. This has however been removed, presumably to allow the
tax authorities more scope to review contracts and assess whether FCT
can apply, regardless of what Incoterms are applied.

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