VAT afloat in a confused sea

Firms providing a range of services need to keep a clear head to meet VAT requirements

To maintain Vietnam’s export competitiveness, “exported services” are subject to 0 per cent VAT and defined to include services provided directly to organisations and individuals overseas or in non-tariff zones, which are supported by a contract and bank payment voucher.

Organisations overseas means foreign organisations which do not have any permanent establishment (PE) and are not VAT taxpayers in Vietnam.

The key point in determining if the 0 per cent VAT is applicable is whether a PE exists for the overseas organisations. The PE definition is, however, broadly defined under the domestic Corporate Income Tax (CIT) regulations, and is modified in some cases (although not relevant for VAT assessment) by double tax avoidance agreements between Vietnam and various countries.  Some common questions asked include:

l At which point of the project does the tax authority determine the PE status i.e. at the beginning based on the estimated project duration, or at the end of the project based on the actual project duration?

l If an overseas organisation has multiple projects at one time in Vietnam, is the PE determined in accordance to the duration of one project or all projects together?

Given that the complexity of the PE definition and the absence of a clear and fast rule to determine the existence of a PE yet in Vietnam, service providers to overseas organisations with limited information available to them are left in the dark as to the VAT treatment.  The insertion of PE rules as qualifying criteria for exported services seems to complicate rather than to simplify the issue as compared to previous regulations. In practice, we have noted that certain taxpayers have taken the position that a PE exists only when there is a legal presence in Vietnam without analysing further the PE definition under the current regulations. Given there is lack of guidance in this respect, such interpretation may still be challenged by the tax authorities. We expect the Ministry of Finance (MoF) or General Department of Taxation (GDT) to provide further guidance in this area soon. 

The current VAT regulations are also silent as to whether 0 per cent VAT is applicable to exported services when the services are “consumed” outside Vietnam. Previously there was a territorial consumption test to determine whether exported services should be consumed outside Vietnam, in a way easing the determination of exported services.

Without the territorial consumption test, if the definition of exported services is applied literally, as long as an entity falls within the definition of an organisation overseas, the services rendered shall be considered exported services and 0 per cent VAT shall be applied even though the services are for the benefit of a local customer.

It is worth noting that this indicates the increasing scrutiny of the tax authorities as to the presence of a PE of foreign organisations in Vietnam. In this regulatory environment, it is recommended that enterprises with substantial exported services may seek further consultation from tax advisors to reduce risk of any non-compliance of VAT regulations.

Shall a contractor issue VAT invoices on advance payments?

In Vietnam, given VAT invoices are vital in substantiating the deductibility of business expenses for tax purposes, frequently, the Vietnamese party will request a clause to be inserted into the contract requiring that “VAT invoices shall be issued upon receiving the payment including advance payment”. Given such requirement, the contractor is required to issue a VAT invoice when receiving advance payment i.e. normally upon the signing of the contract, even though no work has been performed.

The current VAT regulations stipulate that the timing for determination of VAT shall in the case of construction and installation, be the time of acceptance and handover of the completed work, irrespective of whether money was received. With the issuance of the VAT invoice, as well as collecting 10 per cent VAT, the Vietnamese contracting party shall technically be able to claim the 10 per cent VAT as input VAT or obtain a refund if the input VAT is greater than its output VAT. However, in practice, some tax authorities have disallowed such input VAT credit on the basis that there is no requirement to issue VAT invoice on advance payment under the VAT regulations. Such instance significantly impacts the cash flow of the Vietnamese contracting party and should be reviewed when entering into a contract.     

Is VAT a cost to the export processing enterprise (EPE)?

In general, an EPE is subject to 0 per cent VAT for the purchase of goods and services if customs clearance procedures are being completed, for goods only. Through many official letters, the tax authorities have clarified that goods and services such as real estate, convention hall and office rental, hotel, warehouse and transportation services for employees provided by domestic businesses and consumed outside of EPE shall be subject to 10 per cent VAT. Notwithstanding this, there are still many areas that remain ambiguous as to whether 10 per cent VAT shall be applicable.

For instance, when the VAT regulations were first issued, some local tax authorities have taken the position that services provided to an EPE where the place of rendering and consuming the service is outside the EPE are subject to VAT at 5 or 10 per cent. Examples are where services are provided at a house, conventional hall, office rental, hotel, warehouse, transportation of workers, and logistics services which are provided by outside EPEs i.e. delivery of goods from bordergate to EPE, customs clearance, loading and unloading services.

 As of late 2009, the GDT has, via recent tax rulings to all provincial tax departments, corrected the above interpretation. Accordingly, only services of moving workers to and back from the EPEs are subject to 10 per cent VAT and logistics charges such as freight and customs clearance related charges incurred on goods and material to the EPE shall remain at 0 per cent VAT. For those issued VAT invoices with 5 or 10 per cent VAT, the service provider shall issue an invoice to adjust the VAT charged to the EPE.

Given there are still many issues on VAT regulations which remain ambiguous, EPEs should always keep track of developments of the VAT regulations to avoid additional costs incurred for doing business in Vietnam.

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(*) Circular 129/2008-TT-BTC dated December 26, 2008, providing guidelines for implementation of the Law on Value Added Tax (“Circular 129”), which is effective from January 1, 2009.

Authors are Le Thi Kieu Nga, (nkle@kpmg.com.vn) and Er Say Hun, (ser@kpmg.com.vn). The views expressed by the authors here do not necessarily represent the views and opinions of KPMG.