Blueprint builds on hopes for cross-border tax collection

Although some see taxes on digital services as negative, nations are working to find suitable solutions, photo Le Toan

The new Law on Tax Administration and Decree No.126/2020/ND-CP, which stipulates the guidelines of the law, officially came into force from last July and in December, respectively. Under the latest decree, the General Department of Taxation (GDT) will identify the names and websites of overseas suppliers that have not made a tax registration to banks and intermediary companies.

Once identified, banks and other payment intermediary entities will be responsible for withholding tax on the payment to these suppliers monthly. If the bank cannot collect taxes because of unforeseeable issues, such transactions will need to be reported to the GDT monthly for tax management.

Banks are also required to provide bank account details of taxpayers to the tax authority within 90 days upon the effective date of the decree. Furthermore, information on bank account transactions of an entity must be provided to the authority upon official request during a tax audit or inspection.

Thus, cross-border players such as Facebook, Google, and Netflix cannot use the lack of specific regulations as a reason for their neglect in tax fulfilment in Vietnam despite the effective amendment law and even the Law on Cybersecurity from 2018.

According to Clause 42 of the new Law on Tax Administration, cross-border service suppliers that earn money from Vietnam have to register with local tax authorities, declare their taxes, and make payments.

Otherwise, Article 27 stipulates that banks will automatically deduct tax payments from the accounts of those who do not obey their tax obligations or third-party payment provider accounts as soon as overseas transactions occur.

The local prospects of charging taxes from overseas tech titans are largely optimistic thanks to fresh tax rules from the Organisation for Economic Co-operation and Development (OECD), forecast to be launched in the middle of this year.

According to information published by the OECD last October, participating nations such as Vietnam are likely to broaden the right to tax business profits of the companies per the international code in which users of automated digital services are located. In other words, the physical presence requirement for taxation would be replaced with new rules based on the source of the revenue like the internet address of end-users. This would allow Vietnam to tax revenues generated from sales to Vietnamese end-users.

Foreseen efficiency

With the changes to the existing tax rules, Vietnam is expected to eventually increase the ability to tax overseas companies earning in Vietnam without official branches, according to Dean Rolfe, tax partner at KPMG.

“This is however just a blueprint for consideration, discussion, and ideally future political agreement between the participating jurisdictions,” Rolfe explained. “International consensus has not been achieved and much work is still needed to address remaining issues and areas of concern. In any case, the final adoption of these measures is likely to be some years away, even if an international consensus is ultimately reached in 2021 or beyond.”

Vu Tu Thanh, deputy regional managing director and Vietnam’s representative at the US-ASEAN Business Council, also told VIR the new law’s adjustments allowed the taxing of businesses without a presence in Vietnam are positive and more advanced than the previous legislation.

He said that no measures in the world currently comprehensively tax businesses. However, in comparison with past regulations, the new moves would help the Vietnamese government to collect more taxes than previously.

Under pressure from local tax authorities, American over-the-top (OTT) platform Netflix last December worked with the Ministry of Finance and the GDT to prepare for its tax obligation in Vietnam.

Netflix and other overseas OTT platforms have about one million subscribers in Vietnam with estimated sales of about VND1 trillion ($43.47 million) annually. However, none of them pays towards the national budget, according to Minister of Information and Communication Nguyen Manh Hung.

“This has led to prolonged unfair competition with domestic OTT companies,” Hung said.

Meanwhile, both Facebook and Google are remaining silent about their responsibilities. The GDT has informed that its leading mission in 2021 is to measure the actual number of partners of the tech giants in order to implement tax collection.

In addition to the local authorised partners, the two tech titans also have tens of thousands of advertisers – mainly small- and medium-sized enterprises and individual online vendors.

However, only authorised partners have been paying foreign contractor withholding tax for Facebook and Google at the rate of 5 per cent. According to a VIR source, there are dozens of authorised partners of Facebook and Google in Vietnam.

The source also revealed that the pair sign about 10 contracts annually with authorised companies at a value of VND200-300 million ($8,700-13,000) each. Calculated with the 5-per-cent foreign contractor withholding tax rate, they pay about $4,350-6,500 a year in total – a tiny sum when placed up against their annual earnings of hundreds of millions of US dollars.

Bearing the brunt

Along with the foreseen benefits of the national budget, there are some warnings that local end-users will foot the bill.

“If anything, the digital giants are passing their additional costs to consumers, which means that consumers of these international digital giants in country X are paying the government of country X,” US-based consultant firm Frost & Sullivan noted in Nikkei Asia Review.

At the end of the day, the digital tax levies are no different from a tax on tobacco and alcohol products for their harm to customers, the firm added.

As the issue started to become more prevalent in Vietnam a couple of years ago, Global Digital Foundation managing director Paul MacDonnell noted, “A digital services tax could do what all 'sin' consumption taxes are intended to do – depress consumption at the expense of raising government revenue. Digital services taxes are, therefore, likely to be regressive.”

Meanwhile, Vietnam and the US have yet to reach an avoidance of double taxation agreement. Therefore the cost burden on end-users, if they fulfil the tax duty, may yet come to pass.