Foreign contractors, such as the ones who worked on the Can Tho bridge, can enjoy reduced tax compliance procedures.

 

The move, as specified by Circular 197/2009/TT-BTC dated October 9, 2009, will dramatically cut compliance procedures for foreign contractors and help investors to save costs. The hybrid method allows foreign contractors to file value added tax (VAT) returns to claim back the input VAT incurred from using local sub-contractors and pay corporate income tax (CIT) at relatively low deemed rates, the amount of tax savings can be very significant accordingly.

 

Without this method, CIT calculations based on the actual net profits would involve unnecessary administrative procedures, such as adopting the full Vietnamese accounting system and the justification of deductible expenses allocated from overseas for projects implemented in Vietnam.

 

The release of the long-awaited Circular 197 saves domestic and foreign investors from the possible entire elimination of the hybrid method, which was abolished under Circular 134/2008/TT-BTC, as opposed to its predecessor, Circular 05/2005/TT-BTC.

 

"The reinstatement of the hybrid method underscores the Vietnamese government’s assertive commitment to protect investors’ interests, which brings back a fantastic opportunity for foreign contractors and investors to save costs in the midst of the economic recovery," said Huong Vu, a partner at Ernst & Young Vietnam.

 

Do Thu Ha, an associate partner of Roedl and Partner Vietnam, said "the circular is highly appreciated by the foreign business community, especially the contractors that are involved in large-scale projects with substantial work subcontracted to local subcontractors.

 

This indicates the government’s creation of favourable conditions for foreign companies working in Vietnam under the foreign contractor’s status," Ha told VIR. Before Circular 134, effective from January 18, 2009, was introduced, Circular 05 specified that foreign organisations not having a Vietnamese legal entity status and foreign individuals doing business or having income in Vietnam subject to withholding tax could declare tax under three methods.

 

First, with the withholding method, the Vietnamese customer will withhold the foreign contractor withholding tax from the payment to the foreign contractor. Second, with the deduction method, CIT is calculated on the actual net profits. The third is the hybrid method. Circular 197 requests written registration and informing local tax authorities by eligible foreign contractors and local investors, respectively, within 20 days from the contract date.

 

Circular 197 also addresses uncertainty with regards to the application of Circular 134. According to which, foreign contractors using the hybrid method for contracts signed prior to January 1, 2009 are still allowed to continue its application.

 

With regards to accounting requirements, foreign contractors applying the hybrid method are required to follow accounting requirements provided by the Ministry of Finance. Of note, a draft circular providing further guidance in this respect is being finalised.

 

In addition, the circular does not provide treatment for contracts with foreign contractors signed between January 1, 2009 and before its effective date. "Hope still remains that further guidance in this respect might bring less administrative burdens where such contracts might need to be resigned to apply for the apparently favourable calculation methodology," Huong said.