HOW TO DEDUCATE ENTERPRISE INCOME TAX IN CASE OF SIGNING A CONTRACT FOR LEASE OF FOREIGN EXPERTS?

FDVN’s opinion:

[1]. According to Article 169, Article 171, and Article 172 of the Labor  Code No.10/2012/QH13 dated June 18, 2012, conditions for foreign citizens to work in Vietnam and work permit are provided as follows:

“Article 169. Conditions for foreign citizens to work in Vietnam

1. A foreign citizens wishing to work in Vietnam must fully meet the following conditions:

…

d) Possessing a work permit granted by a competent Vietnamese state agency, except the cases specified in Article 172 of this Code.

2. Foreign employees working in Vietnam shall comply with the labor law of Vietnam and treaties to which Vietnam is a contracting party which have different …

provisions, and protected by the Vietnamese law.

Article 171. Work permit for foreign citizens to work in Vietnam

1. Foreign employee shall produce his/her work permit when carrying out immigration procedures and upon request of a competent state agency.

2. Any foreign citizen working in Vietnam without a work permit shall be deported from Vietnam according to the Government’s regulations.

3. Any employer employing foreign citizens without a work permit shall be handled in accordance with law”.

Therefore, in principle, foreign citizens who come to work in Vietnam must have a work permit. Without a work permit, the foreign citizens shall be expelled from the territory of Vietnam according to the provisions of Clause 2, Article 171 of the Labor Code 2012.

Regarding the calculation of expert hiring fees in credited expenses when determining taxable incomes of enterprise incomes: Currently, the tax departments in each community have issued general guidelines, and those guidelines identify in case that: “if enterprises hire foreign employees working in Vietnam without a work permit granted by a competent Vietnamese state agency in accordance of the Labor Law, don’t have enough bases to calculate into credited expenses when determining taxable incomes of enterprise incomes and don’t have enough bases to the credit of input value-added tax for the expenses that enterprises have to paid for the above employees” " [Official dispatch No.7583/CT-TT-HT dated July 4, 2014, of Binh Duong Tax Department; Official dispatch No.6351/CT-TTHT dated February 15, 2019, of Ha Noi Tax Department]…

Therefore, in case that enterprises hire a foreign expert who is a manager of a restaurant, hotel without a work permit under the Vietnam Law, the expenses of hiring experts shall not be credited into enterprise income tax. Therefore, to be deducted the cost of hiring experts, the prerequisite is that the foreign expert must have a legal work permit in Vietnam.

[2]. Withhold records of expert hiring expenses from enterprise income taxable expenses.

According to Article 4 of Circular No.96/2015/TT-BTC on amendments, supplements to article 6 of Circular No.78/2014/TT-BTC dated June 18, 2014 (be amended at Clause 2 Article 6 of Circular No.119/2014/TT-BTC and Article 6 of Circular No.151/2014/TT-BTC) on deductible and non-deductible expenses when calculating enterprise income tax:

 “Article 6. Deductible and non-deductible expenses when calculating taxable income

1. Except for the non-deductible expenses prescribed in Clause 2 of this Article, every expense is deductible if all of these following conditions are satisfied:

a) The actual expense incurred is related to the enterprise’s business operation.

b) There are sufficient and valid invoices and proof for the expense under the regulations of the law.

c) There is proof of non-cash payment for each invoice for the purchase of goods/ services of VND 20 million or over (including VAT).

The proof of non-cash payment must comply with regulations of law on VAT…”

As  prescribed provisions in Clause 10 Article 1 of Circular No.26/2015/TT-BTC dated February 27, 2015, of Ministry of Finance, amendments and supplements to Article 15 (be amended in Circular No.119/2014/TT-BTC dated August 125, 2014 and Circular No.151/2014/TT-BTC dated October 10, 2014, of Ministry of Finance) regulated on conditions for input VAT deduction:

“1. Legitimate VAT invoices for purchases or receipts for payment of VAT on imported goods, or receipts for payment of VAT on behalf of foreign organizations that do not have Vietnamese legal status and the organizations and individuals, and the foreigners that do business or earn income in Vietnam.

...

2. Proofs non-cash payments for the purchases (including imported goods) that cost VND 20 million or more, except for the imports that cost below VND 20 million each, purchases that cost below VND 20 million inclusive of VAT, and imports being gifts, donations from overseas entities.

Receipts for non-cash payments include bank transfer receipts and other receipts for non-cash payments prescribed in Clause 3 and Clause 4 of this Article”.

Including that, Bank transfer confirmations are documentary evidence proving the transfer of money from the buyer’s account to the seller’s account opened at providers of payment services under legitimate payment methods such as checks, payment orders, cash collection orders, bank cards, credit cards, SIM cards (digital wallets) and other means of payment as prescribed (including the cases in which the buyer transfer money from the buyer’s account to the seller’s account carrying the name of the owner of a private enterprise or from the buyer's account carrying the name of the owner of the enterprise to the seller's account).

Thus, to be credited expenses of hiring expert, enterprises need to prepare a tax declaration as follows:

- Contract for hiring expert between Enterprise and foreign expert;

- Valid payment confirmations: payment order or payment voucher, bank transfer confirmation, receipts for other non-cash payments;

-    A work permit of the foreign expert;

-  A personal income tax declaration of the foreign expert (if any).

[3]. Note about personal income tax withholding of foreign before paying the income under Article 25 of Circle No.111/2013/TT-BTC.

In this case, to ensure for your company before paying wages, allowances, benefits, and other payments to foreign expert, your company needs to credit personal income tax of foreign in advance under Article 25 of Circular No.111/2013/TT-BTC as follows: “The organization or person that pays a total income from 2 million VND a resident that does not sign a labor contract (as guided in Point c and Point d Clause 2 Article 2 of this Circular) or that signs a labor contract for less than 03 months shall withhold 10% tax on the income before it is paid to the person.

For the person that earns only a taxable income as stated above but the total taxable income estimated after personal deductions are made does not reach the taxable level, the person shall make and send a commitment (the form is provided in the guiding documents on tax administration) to the income payer as the basis for temporarily exempting the income from personal income tax.

Based on the commitment made by the income-earner, the income payer shall not withhold tax. At the end of the tax year, the income payer shall make a list of persons that earn incomes below that taxable level (the form is provided in the guiding documents on tax administration) and send it to the tax authority. The persons are responsible for the commitments they made. Any deceit discovered shall be penalized in accordance with the Law on Tax administration.

The persons that make commitments as guided in this Point shall obtain tax registration and have tax codes when the commitments are made”.

So, if a total income from 2 million VND, your company needs to withhold 10% tax on the income before it is paid to a foreign expert. This is the amount of withholding that your company temporarily withholds to institute law provisions on the law on personal income tax. The rights of income withholding before paying shall be included in hiring contracts/ service contacts/ consulting contacts when signing with foreign experts.

Above is FDVN Law Firm’s opinion for your consulting requests based on studying the relevant legal provisions. Hopefully, FDVN’s advice would be helpful to you.

Tran Thi Hau – FDVN LAW FIRM

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