Understanding the US-Vietnam tax agreement

The Agreement for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income (“Agreement”) is similar to the US Model Income Tax Treaty (version 2006). The Technical Explanation that provides the interpretation of the US Model Income Tax Treaty can be found on IRS’ website. Although the Agreement has been signed, it remains subject to ratification by each country. It contains 30 Articles and a protocol, and deals only with income taxes (not indirect taxes) imposed in Vietnam and in the US. Currently, Vietnam imposes two income taxes: personal income tax (PIT) and corporate income tax (CIT).

Important concepts and definitions

To have a better understanding of the Agreement, we start with a discussion of the Agreement’s key two concepts: “resident” and “permanent establishment” (PE).

Resident of the US

A “resident” of the US is defined in the Agreement as any person who, under the laws of the US, is liable to taxation in the US by reason of his domicile, residence, citizenship, place of incorporation, place of registration, place of management, or any other criterion of a similar nature.

Resident of Vietnam

A “resident” of Vietnam is defined in the Agreement as any person who, under the laws of Vietnam, is liable to be taxed in Vietnam by reason of his domicile, residence, citizenship, place of incorporation, place of registration, place of management, or any other criterion of a similar nature.

The Agreement also addresses the situation in which a person is deemed to be a resident of both countries.

PE concept

A US company is taxed in Vietnam if it carries on its business through a PE in Vietnam. If the same company has no PE in Vietnam, it is taxable only in the US and it is not taxed in Vietnam. For tax planning purposes, a US company should address PE-related issues when it carries on business in Vietnam.

The concept of a “PE” under Vietnamese tax regulations is generally broader than the concept defined in the Agreement. As a general rule, the concept of a “PE” under the Agreement will prevail where it differs from Vietnamese tax regulations. The concept of a “PE”, as defined in the Agreement, means a fixed place of business through which the business of an enterprise is wholly or partly carried on. The term “PE” under the Agreement generally encompasses:

(a) A building site, construction, exploration, assembly or installation project or supervisory activities if such site, project or activities last more than six months.

(b) The provision of services, including consultancy services in Vietnam through employees or other personnel engaged by a US company for such a purpose if such services continue (for the same or a connected project) within Vietnam for a period or periods aggregating more than 183 days within any 12-month period.

(c) A US company may be deemed to have a PE in Vietnam if it carries on business in Vietnam through a broker, general commission agent, or any agent having a dependent status.

(d) A US company may be deemed to have a PE in Vietnam in circumstances where a person acts in Vietnam on behalf of a US company in respect of any activities which that person undertakes for the US company, if such a person has and habitually exercises in Vietnam authority to conclude a contract in the name of the US company.

Tax benefits

Once the Agreement comes into effect, residents of the US and Vietnam can enjoy tax benefits previously unavailable.

Residents of the US

Currently, a resident of the US who derives income, profits or gains is taxed in Vietnam. The same income, profits or gains of the same person could be non-taxable after the effective date of the Agreement. To enjoy tax benefits under the Agreement, a resident of the US must be a “qualified person”. That is, tax exemption under the Agreement is not automatic. An eligible person must file and provide documents required by the local tax authorities in particular and actual circumstances. Particular conditions and criteria for an individual or company to be a “qualified person” are set out in Article 23 of the Agreement. For example, an individual resident of the US will be entitled to all benefits under the Agreement. However, if the same individual resident receives income as a nominee on behalf of a third country resident, such benefits may be denied because the Agreement requires that the beneficial owner of income must be a resident of the US.

In addition to the above tax benefits, the Agreement provides a limitation on withholding taxes imposed on certain incomes [e.g. dividends (5 per cent or 15 per cent), royalties (5 per cent or 10 per cent), and interest (10 per cent)]. These capped rates are equal to or higher than the current rates in Vietnam.

Subject to US law, under the Agreement, the US will allow a tax resident or a citizen of the US a credit against US tax on income taxes paid or accrued in Vietnam.

Residents of Vietnam

A US citizen may become a resident of Vietnam, by staying in Vietnam for 183 days or more within a calendar year or within 12 consecutive months, or if they have a permanent home in Vietnam, or if they have a close personal and economic relationship to Vietnam, etc. Consequently, he/she may be taxed in both the US and Vietnam. There is a regime for him/her to subtract tax amounts paid in the US from tax liabilities in Vietnam. However, the amount of the credit must not exceed the amount of Vietnamese tax computed in accordance with the tax regulations of Vietnam.

In addition, a Vietnamese company holding at least 10 per cent of the voting stock of a company that is a resident of the US and from which the Vietnamese company receives dividends, is entitled to certain benefits. It may subtract from its tax liabilities in Vietnam tax amounts paid to the US by or on behalf of the payer in respect of profits out of which the dividends are paid. As in the case of individuals, the credit must not exceed the Vietnamese tax computed in accordance with Vietnamese tax regulations.

As a result of the execution of the Agreement, several individuals or entities that are residents of the US may avoid certain income taxes imposed in Vietnam. This includes individual consultants who provide services on a short-term basis; employees who work in Vietnam on a short-term assignment; US firms with income in Vietnam but with no PE in Vietnam; “qualified” sellers in share transfer arrangements; US airlines and shipping lines, etc. A US citizen who is a resident of Vietnam can also subtract taxes paid in the US from his tax liabilities in Vietnam. These tax benefits are available only after the Agreement has been ratified.

The execution of the Agreement and the recent TPP Agreement are further signs of enhanced economic co-operation between the two countries. Although the Agreement accords tax benefits to tax residents of both countries, the current value of the Agreement to US investors is probably greater because inbound investment from the US to Vietnam is greater than outbound investment from Vietnam to the US. The imbalance may change when implementation of the TPP increases Vietnamese investment in the US.