However, in case the foreign organization acts as payment intermediary for transactions of goods sale and service provision between overseas sellers and buyers in Vietnam, the service charges received from the sellers outside Vietnam shall not be subject to withholding tax.
If the parent company fails to meet the conditions for paying tax according to the declaration method, the subsidiary company shall be responsible for withholding, paying tax on behalf of the parent company according to the rates of 5% value added tax (VAT) and 5% enterprise income tax (EIT) (Article 12, Article 13 of Circular No. 103/2014/TT-BTC).
Regarding exchange rates used for conversion of revenue in a foreign currency for calculation of withholding tax, they shall be determined as follows: If the parent company has an account in Vietnam, the buying rate of the commercial bank where parent company’s account is opened shall be applied; In case the parent company does not have an account in Vietnam, the selling rate of the commercial bank where the subsidiary company’s account is opened shall be applied.
With regard to value added tax (VAT), it shall be exempt because the compensation for the breach of a sale contract is exempt from VAT according to Clause 1 Article 5 of Circular No. 219/2013/TT-BTC.
In principle, the Vietnamese party that pays the compensation shall be responsible for withholding and paying withholding tax. However, if the Vietnamese party has not yet withheld tax and the foreign party authorizes a third party in Vietnam to receive the compensation on its behalf, the third party shall be responsible for withholding and paying withholding tax on behalf of the foreign party.
Accordingly, in case a company buys the right to use software from a foreign provider, before making payment for fees (including the initial registration fee and fee for annual extension), the company shall withhold and pay withholding tax which is 10% of revenue on behalf of the foreign provider.
Particularly, value added tax (VAT) in terms of withholding tax shall be exempt because the software is not subject to VAT (Circular No. 219/2013/TT-BTC).
However, if there arises compensation upon the cancellation of the contract, the compensation shall be subject to withholding tax (refer to Official letter No. 11503/CT-TTHT dated March 26th, 2018). At the same time, because this amount of compensation is not corresponding to revenue for calculation of enterprise income tax (it does not create any revenue), it shall not be accounted into reasonable expenses as regulated at Article 4 of Circular No. 96/2015/TT-BTC.
Accordingly, in case a company in Vietnam goes into partnership with a foreign company in order to provide the construction counseling and supervision services in Vietnam. However, later on, the foreign party agrees to transfer the whole work to the company, terminates the service provision, does not earn income in Vietnam and the Vietnamese party does not pay any amount to the foreign party, it is not required to withhold tax incurred by the foreign contractor in this case.
Concurrently, according to Article 1 of Circular No. 111/2013/TT-BTC, non-resident individuals shall only pay personal income tax (PIT) on income earned within the Vietnamese territory.
Accordingly, in case a foreigner is a non-resident individual who provides the brokerage service outside Vietnam for a Vietnamese enterprise, the brokerage commissions shall not be subject to withholding tax in terms of PIT.