Income tax hike looms for foreign contract workers

The circular, which is being finalised by the Ministry of Finance for submission to the government next month, is to take effect from July 1 if passed.
Several changes are in store for the tax system currently applied to foreign contractors due to the new Value-Added-Tax (VAT) Law and Enterprise Income Tax (EIT) Law.
Currently, foreign contractors are required to pay taxes only on income generated from business activities conducted in Vietnam. Tax rates will also be increased for foreign contractors without permanent residency in Vietnam who are not registered to use the Vietnamese Accounting System.
Foreign lawyers and consultation firms in Vietnam were quick to point out several shortcomings in the draft.
They said the draft could discourage foreign contractors from conducting business in Vietnam and also discourage Vietnamese enterprises from signing contracts with foreign parties.
“These adjustments will no doubt increase the tax burden for foreign contractors and will indirectly exert a negative impact on the development of Vietnamese enterprises [who sign with foreign contractors] due to higher costs,” said Ngo Quang Thinh, a tax manager with international auditing firm Ernst&Young Vietnam.
He questioned why contractors had to pay tax to the Vietnamese government for income earned outside the country.
In reply, head of the tax department for foreign-investors in the General Department of Taxation, Nguyen Dinh Cu, explained that if foreign contractors did not pay income tax in Vietnam, they would still have to pay tax in the country they were registered in and the Vietnamese party would still have to pay more or less the same amount.
“This way it will be easier for us to manage businesses and it is also in line with international practice,” Cu said.
Thinh, however, was not convinced by the rationale.
“That would be true if there was a double-tax avoidance agreement signed between Vietnam and the country of residence of the contractors,” Thinh said.
“In the absence of such agreements, the proposed tax mechanism will not work effectively.”
As far as EIT is concerned, Cu said one of several purposes of applying a uniform rate of 28 per cent to all contractors was to address the increasing problem where higher-taxed groups of contractors tried to find all possible ways to dodge laws to be classified as lower-taxed contractors.
However, consultants pointed out that it would not be fair to enact regulations that, instead of dealing with specific and limited cases, would penalise all businesses or contractors.
The General Department of Taxation promised it would take a closer look at the circular before giving it the go ahead and has said it welcomed comments from both local and foreign businesses.