Foreign organizations and individuals act as brokers for Vietnamese enterprises to receive commissions have to be imposed foreign contractor tax.

Legal grounds:

• Circular No. 103/2014/TT-BTC;
• Circular No. 111/2013/TT-BTC.

We get the following questions:

My company specializes in software outsourcing for foreign clients. I have some partners abroad they refer new clients to me to get commission. I want to ask when the company pays a commission to a foreign partner, does my company have to pay any tax?

In principle, overseas individuals and organizations that do not reside or have commercial presence in Vietnam, if they have income in Vietnam, then must pay foreign contractor tax.

1. Cases the enterprise must pay foreign contractor tax

Pursuant to Clause 1, Article 1 of Circular No. 103/2014/TT-BTC as follows:

Article 1. Subjects of application

The guidance in this Circular applies to the following entities (except for the case specified in Article 2, Chapter I):

1. Foreign business organizations that have a permanent establishment in Vietnam or do not have a permanent establishment in Vietnam; foreign individuals doing business in Vietnam or not being residents in Vietnam (hereinafter collectively referred to as foreign contractors and foreign sub-contractors) doing business in Vietnam or earning income arising in Vietnam on the basis of a contract, agreement, or commitment between a foreign contractor and a Vietnamese organization or individual or between a foreign contractor and a foreign sub-contractor to perform a part of the work of contractor contract.

According to the above provisions, if an organization or individual abroad (collectively referred to as a foreign contractor) generates income in Vietnam on the basis of a contract or agreement, it is subject to regulation of Circular No. 103/2014/TT-BTC, so must pay tax of foreign contractors.

Pursuant to Clause 4, Article 2 of Circular No. 103/2014/TT-BTC as follows:

Article 2. Objects not applicable

The guidance in this Circular does not apply to:

4. Foreign organizations and individuals provide the following services to Vietnamese organizations and individuals whose services are performed abroad:

• Repair of means of transport (aircraft, aircraft engines, spare parts for aircraft, ships), machinery and equipment (including marine cables, transmission equipment), whether or not including replacement materials and equipment attached;
• Advertising and marketing (except advertising and marketing on the internet);
• Investment and trade promotion;
• Brokerage: selling goods and providing services abroad;

According to the above regulations, it should be noted that if an overseas partner provides brokerage services to Vietnamese enterprises, but the service is performed abroad, it is not subject to the regulation of Circular No. 103/2014/ TT-BTC, so the Vietnamese enterprises do not have to pay foreign contractor tax. For example:

• A foreign partner do brokered a client based in a foreign country, then it can be considered as a partner who has performed services abroad.

2. Tax rate of foreign contractor tax on providing brokerage services

Pursuant to Article 5 of Circular No. 103/2014/TT-BTC as follows:

Article 5. Applicable taxes

1. Foreign contractors and foreign sub-contractors being business organizations shall fulfill their value-added tax (VAT) and corporate income tax (CIT) obligations under the guidance in this Circular.
2. Foreign contractors, foreign sub-contractors being foreign individuals doing business shall fulfill their VAT obligations under the guidance in this Circular and personal income tax (PIT) according to the law on PIT.
3. With respect to other taxes, fees and charges, foreign contractors and foreign sub-contractors shall comply with current legal documents on taxes, fees and other charges.

According to the above regulations, foreign contractors will have to pay two main types of taxes, including:

• If the contractor is an organization: pay VAT and CIT;
• If the contractor is an individual: pay VAT and PIT.

Pursuant to Article 8 of Circular No. 103/2014/TT-BTC, in the case of the above question, partners who do not reside or have commercial presence in Vietnam shall apply tax declaration by direct calculation method on percentage of revenue.

So,

If the brokerage contractor is a foreign organization, the Vietnamese enterprise must pay tax to the foreign contractor as follows:

• VAT rate for the service business is: 5% (based on Article 12 of Circular No. 103/2014/TT-BTC);
• CIT rate for the service business is: 5% (based on Article 13 of Circular No. 103/2014/TT-BTC)

If the brokerage contractor is a foreign individual, the Vietnamese enterprise must pay tax to the foreign contractor as follows:

• VAT rate for the service business is: 5% (based on Article 12 of Circular No. 103/2014/TT-BTC);
• PIT rate for the service business is: 5% (based on Article 17 of Circular No. 111/2013/TT-BTC).