Taxation of e-commerce in Vietnam – Part II
September 2, 2021
By Nam Nguyen, Kreston NNC, Vietnam
Vietnam’s recent introduction of the taxation of e-commerce may be a game-changer and worthy of a rethink of market entry strategies for foreign trading companies. Below is why.
In the past, the key considerations for foreign trading companies in deciding how to sell their products in Vietnam’s market, beside the need to test the market first, included the administrative challenges in setting up a trading company, due to Vietnam’s restrictions on wholly foreign-owned trading, distribution, and retail businesses. Obtaining the licenses to conduct direct import, trading, distribution, and retail involved a lengthy and costly process. Setting up a company in Vietnam required physical presence including a proper business premise, the exorbitant rental of an office space, and of course the consideration of whether the business was ready yet to establish a taxable presence in Vietnam.
Those considerations often lead foreign trading companies to the choice of selling their products to Vietnam under a distributorship agreement with a local distributor or through direct online sales, rather than setting up a subsidiary in Vietnam. These business models do not require any business license, save operating costs, have limited risk, and avoid taxable presence in Vietnam. In most cases, sales of products to Vietnam through a distributor or direct online sales were regarded as purely commercial transactions (or trading-WITH-Vietnam) and foreign suppliers were often not subject to the foreign contractor withholding tax. In the worst-case scenario, if a sale was regarded as a taxable transaction (or trading-in-Vietnam) the gross sales would be taxable at the deemed flat rates of 1% VAT and 1% CIT (corporate income tax). However, a foreign supplier could effectively pay no Vietnamese tax if it passed the VAT to its distributors or business customers (as they would be able to recover the VAT as their input VAT), and it could rely on a tax treaty with Vietnam (if applicable) to claim an exemption of the 1% CIT under the tax treaty. The risk of taxable presence (i.e. permanent establishment or PE) in Vietnam existed, but it was relatively lower than it is today.
The recent introduction of new rules on taxation of e-commerce potentially leads to increased PE risk in Vietnam for foreign suppliers. Although the issue has not yet been specifically addressed by the new rules, if digital business presence means physical business presence in Vietnam, then it would follow that foreign e-commerce suppliers could no longer benefit the trading-WITH-Vietnam exemption or tax treaty exemption. So, PE risk may no longer be relevant.
For trading sector, the profit margin is often low in comparison to other sectors, and volume is very important. As sales volume grows, paying CIT at 20% of profit (for trading companies) could be more tax efficient than paying a total withholding tax at 2% of the gross revenue. As an example, assuming the average gross margin for trading of popular consumer products in Vietnam ranges from 15% to 22% (or net profit margin from 4% to 8%, according to a private bench-marking exercise), then paying Vietnam’s withholding tax at a total of 2% on the gross sale revenue could be higher than paying the CIT at 20% of the net profit. If that is the case, then doing business in Vietnam as a foreign contractor may no longer necessarily be the most effective option for foreign trading companies.
It is needless to say that there are lots of advantages in trading in Vietnam through a local subsidiary than as a foreign contractor, which can give trading businesses a competitive edge. The advantages include greater market access, visibility and product marketability, efficiency, volume growth potential, and less dependency on local distributors etc. Besides that, setting up a trading company in Vietnam is much easier, faster, and less costly nowadays than it used to be. Therefore, it may be worthwhile of a revisit to this option.
Beside the company option, there is another option of setting up a Representative Office in Vietnam which can help a foreign trading company to achieve greater market access and visibility and drive volume growth in Vietnam. It is a hybrid option between the company model and the foreign contractor model. A detailed comparison of these three business models can be viewed here. If you missed our last article on this topic, please click here to view.
Kreston NNC’s team in Vietnam has extensive hands-on experience in helping clients reviewing and evaluating their Vietnam business models and market entry strategies. If you need professional support in this area, please contact the author at firstname.lastname@example.org.