The Tax Administration Law in Vietnam has brought notable changes to improve tax collection and to keep abreast of changes to the digital economy. Valerie Teo and Nguyen Tan Tai, of Grant Thornton, consider the impact of the new law, effective from July 1, 2020, on e-commerce business in Vietnam.
There has been a rapid growth of e-commerce business in Vietnam’s economy in the past decade.
The development of digital and payment technology has driven and changed the ways that e-commerce organizations do business in Vietnam. While the growth of e-commerce businesses has created a positive impact on Vietnam’s economy including contribution to the State Budget, it has also brought certain challenges to the Vietnam tax authority, especially considering cross-border e-commerce business, where a large number of transactions made by nonresident offshore suppliers via online marketplaces have fallen out of the Vietnam tax authority’s control due to the limitation of the existing tax withholding regime.
In response to the above, in 2019 the Vietnam government introduced a new Tax Administration Law (LTA 2019), effective from July 1, 2020, which has brought notable changes to improve the tax collection regime and keep up with the pace of the economy’s digitalization. In this article, the authors would like to provide some highlights and discuss the impact of the LTA 2019 on e-commerce business in Vietnam.
E-Commerce Law and Tax Law
Under the law on e-commerce, e-commerce business is defined as conducting part, or the whole, of the process of commercial activity by electronic means connected to the internet, mobile telecommunications network or other open networks.
Whereas the previous law on e-commerce only applies to Vietnamese organizations, individuals, Vietnam-resident individuals, non-Vietnam organizations present in Vietnam through investment activities, a branch, a representative office or a website under a Vietnamese domain name, the LTA 2019 applies more extensively to a wider range of taxpayers.
While the new rules under the LTA 2019 on e-commerce can be understood to target offshore entities deriving income from doing cross-border e-commerce business in Vietnam, and given there is still a difference of applicable subjects between the law on e-commerce and the LTA 2019, further regulatory guidance under the law on e-commerce may be on its way to fix the difference and complete the new tax withholding regime.
Withholding Tax Implications
Income earned by a foreign company through supplying goods or services in Vietnam without setting up a legal entity in Vietnam is subject to the withholding of Foreign Contractor Tax (FCT).
In the event of the supply of goods without associated services rendered in Vietnam; services rendered and consumed outside of Vietnam, etc., FCT will not be triggered. That is to say, the majority of basic cross-border e-commerce transactions, goods and/or services can be regarded as supplied, rendered and consumed in Vietnam which will accordingly trigger FCT liability.
In the context that the foreign entity does not set up a legal entity in Vietnam, the “deem taxation method” is applied where all administrative responsibilities (i.e. tax filings and payments) rest solely with the Vietnamese party who are in business with the foreign entity.
While the current FCT regime only regulates registered business entities purchasing goods and services from offshore suppliers as the withholding parties, it is challenging for the tax authority to monitor payments made under e-commerce transactions being business-to-consumer (B2C) or consumer-to-consumer (C2C) transactions.
The tax management in the existing FCT regime is no longer considered to be workable for B2C and C2C transactions because the offshore parties involved are not registered to be Vietnam-based and do not have a bank account in Vietnam where payments are made via digital platforms and more importantly, the tax withholding responsibility carried by individuals are impracticable.
Due to the pressure of collecting taxes under such digitalized business models, new statutory obligations have been introduced in the LTA 2019.
Taxation Scheme under LTA 2019
Among other changes, the LTA 2019 has also introduced a new taxation mechanism on non-Vietnam entities carrying out and earning income from doing e-commerce business in Vietnam.
The LTA 2019 has introduced an unprecedented way of collecting taxes and concurrently underlines the responsibilities of the competent authorities to facilitate the tax authority in their tax collection effort. This includes the responsibilities of state agencies, the State Bank of Vietnam and commercial banks, specifically:
The LTA 2019 specifically targets offshore entities who supply goods and services via intermediate digital platforms and who do not have a permanent establishment in Vietnam as they are required to conduct tax registration and payment in Vietnam by themselves or to authorize a third party to perform such obligations on behalf in accordance with the law. A separate tax code shall be granted to the offshore entities to be used for tax declaration and payment purposes.
It is the first time that an LTA involves the coordination of responsibilities of other state agencies rather than among the tax authorities themselves in tax administration. State agencies, including the agencies of the Ministry of Industry and Trade, the Ministry of Information and Communication and the State Bank are now required to coordinate with the tax authority to collect taxes on e-commerce activities conducted by offshore entities.
However, at this stage, it is still unknown how the tax authority and the relevant state agencies shall coordinate in practice. While the LTA 2019 stresses the responsibilities of the competent agencies as exchanging information, establishing an e-commerce payment system at the national level, setting up a payment management mechanism, etc., how to execute these responsibilities remains a major question for the Government under current legislative mechanisms
In addition to the withholding responsibility of Vietnamese withholding parties, the LTA 2019 requires commercial banks to withhold and remit tax on behalf of offshore organizations and individuals doing e-commerce business and deriving income from Vietnam.
Impact on Commercial Banks
- The new rules will leave huge burdens on the local financial institutions in Vietnam, being commercial banks. The responsibilities of withholding taxes from offshore entities may raise the following issues:
- The new rules may unfavorably create significant impacts on payment structures of commercial banks where they must identify the subject-to-tax-payments received by foreign entities.
- In cases of non-compliance, will the commercial banks bear the under-declared tax liability and the relevant penalty?
- Huge burdens such as the management of tax codes and tax declaration data, withholding taxes, reconciliation of tax records with the national tax system, etc. shall require additional resources from the commercial banks to handle. This may create additional workload for the business of commercial banks as they have to take care of these responsibilities in addition to their main business.
Impact on Offshore E-Commerce Entities
Offshore entities should consider the following:
With the additional tax cost that may arise, offshore organizations and individuals who have been/were going to be supplying goods and services to Vietnam via e-commerce platforms should be aware of the new rules for financial planning purposes.
Registration of the tax code or authorizing another party to do so will also create administrative burdens if the offshore entity does not directly conduct a transaction via a Vietnam-based party. Whether or not the offshore entity has to register for tax even if it does not have any presence in Vietnam or how the foreign entity authorizes a Vietnam party to declare and pay tax on its behalf when no Vietnam party is taking part in the e-commerce transaction remains unanswered, given that the current tax administration is not clear on providing guidance at this stage.
If the foreign entity is looking for a Vietnam tax protection under an avoidance of double taxation agreement (DTA) while the tax has already been withheld at the payment process by the commercial banks, the procedures of application for DTA require further specific regulatory guidance by the tax authority.
While the LTA 2019 has already taken effect from July 1, 2020, it appears that not many organizations, commercial banks and competent state agencies are confidently aware of what actions they are going to take to be fully compliant with such rules. Many questions have also been raised between enterprises, commercial banks and representatives of governmental agencies where all parties expect a fair solution to the practical difficulties that the new rules have created.
As the new rules of the LTA 2019 are still in the early stages, further decrees and circulars are now on their way to be published in 2020 according to a confirmation by the Ministry of Finance. Meanwhile, offshore entities are advised to review their current business structure or transactions that are impacted by the new rules and prepare themselves to avoid any surprises from the forthcoming regulatory changes.