To:

- Hwa Seung Vina Co. Ltd.;
- Eclipse Polymers (HK) Co. Ltd.;
- Casum Shoes JSC.;
- Shinex Coatings JSC.;
- Crecimiento Industrial Vietnam Co. Ltd.;
- HongYuan Hai Phong Co. Ltd;
- Samsung Electronics Vietnam Co. Ltd.

In response to your enquiries about application of Double Taxation Agreements between Vietnam and other countries/territories on in-country export/import (hereinafter referred to as Tax Agreements), General Department of Taxation hereby provides the explanation below:

1. Determination of permanent establishments

A quotation from Paragraph 1, Article 5 of the Tax Agreement:

“1. According to this Agreement, “permanent establishment” means a fixed place of business through which the business of an enterprise is partly or wholly carried on."

Accordingly, a foreign enterprise that hires a Vietnamese enterprise to process goods in Vietnam and, on behalf of the foreign enterprise, deliver/transport the processed goods to another enterprise which is also located in Vietnam; or a foreign enterprise that buys goods from an enterprise in Vietnam and sells them to other independent enterprises in Vietnam in the form of in-country export/import and the Vietnamese enterprise which sells goods for the foreign enterprise, on behalf of the foreign enterprise, performs tasks such as following procedures for in-country export/import, delivering goods as requested by the foreign enterprise, putting goods into storage in Vietnam pending goods delivery, recalling goods with unsatisfactory quality that were manufactured/sold in Vietnam through a fixed establishment, which is the processor or seller.

2. Tax liability of permanent establishments

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“1. The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

2. Subject to the provisions of paragraph 3, where an enterprise of a Contracting State carries on business in the other Contracting State through a permanent establishment situated therein, there shall in each Contracting State be attributed to that permanent establishment the profits which it might be expected to make if it were a distinct and separate enterprise engaged in the same or similar activities under the same or similar conditions and dealing wholly independently with the enterprise of which it is a permanent establishment.

3. In determining the profits of a permanent establishment, it shall be allowed to deduct all operating expenses, including executive and general administrative expenses, whether incurred in the Contracting State in which the permanent establishment is situated or elsewhere.

4. No provisions of this Article shall affect the application of any law of a Contracting State related to determination of tax liability of an entity where information provided for the competent authority of that State are not sufficient to determine profits attributable to the permanent establishment, provided such law will be applied in accordance with the principles in this Article within the scope of information provided for the competent authority”.

According to instructions in (1) of this document, a foreign enterprise is considered having a permanent establishment in Vietnam. Therefore, such foreign enterprise shall pay corporate income tax (CIT) in Vietnam on the incomes from performance of the processing contract or goods trading contract in Vietnam in the form of in-country export/import but only so much of them as is attributable to that permanent establishment in Vietnam according to Paragraph 1 Article 7 of the aforementioned Tax Agreement.

The rules for distribution of profits to permanent establishments specified in Paragraph 2, 3, and 4 of Article 7 of the Tax Agreement are regulated in Circular No. 60/2012/TT-BTC dated April 12, 2012 of the Ministry of Finance. In particular:

i) Any foreign enterprise that pays value-added tax (VAT) using credit-invoice method, pays CIT on taxable income on the basis of declared revenues and expenses shall comply with provisions of the Law on Corporate income tax and its instructional documents.

ii) Any foreign enterprise that pays VAT directly on value added, pays CIT on revenue, or pays VAT using credit-invoice method, or pays CIT on revenue shall pay 1% CIT on taxable revenue as instructed in Point 2.a, Article 13, Section 3, Chapter II of Circular No. 60/2012/TT-BTC dated April 12 of the Ministry of Finance.

The addressed enterprises shall comply with the legislative documents referred to in this document./.

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PP DIRECTOR OF INTERNATIONAL COOPERATION DEPARTMENT




Nguyen Duc Thinh