Legal basis for tax collection, payment and management for foreign enterprises

Foreign enterprises must pay tax on taxable income arising in Vietnam through e-commerce activities and business on digital platforms.

Tax management for foreign enterprises in accordance with international practice

Recent trends demonstrate that with the development of science and technology, coupled with e-commerce and cross-border digital economy activities, many foreign enterprises generate income in Vietnam without the need for any physical location or representative office in Vietnam. In many cases, relying solely on the physical presence of a permanent establishment as stipulated in current regulations to serve as the basis for taxation may pose a risk of base erosion.

The Law on Tax Management No. 39/2019/QH14 has recently added a principle in tax management stating that "the nature of activities and transactions determines tax obligations."

The Ministry of Finance has stated that according to international principles and practices, the right to tax is shared between the country where the enterprise is resident and the country where the enterprise generates income; between the country where the enterprise is resident and the country where the enterprise has a permanent establishment. According to the OECD, the traditional concept of permanent establishment with the requirement of "physical presence" is no longer suitable for today's business models.

If, in the past, a permanent establishment required a physical presence (such as a representative office, branch, or factory), with the development of the digital economy, many business activities no longer rely on physical presence, and considering the application of the right to tax based on permanent establishment has led to difficulties and inconsistencies. If a permanent establishment does not include digital economic activities and cross-border e-commerce, disputes may easily arise during implementation.

Referring to international experience, some countries have adjusted their corporate income tax laws to align with the context of the rapidly developing cross-border e-commerce. For example, Indonesia introduced a rule establishing the right to tax virtual permanent establishments in 2020; Malaysia stipulated that all e-commerce transaction income is considered to have originated in Malaysia in 2019;... In addition, Resolution No. 107/2023/QH15 has also specified the taxpayer in the case of applying the supplementary corporate income tax as prescribed in the regulations on combating base erosion and profit shifting.

In this context, to implement the collection, payment, and management of taxes for foreign enterprises providing goods and services to organizations and individuals in Vietnam through e-commerce and digital platform business models, in accordance with international practices; and at the same time, ensure the coverage of taxpayers who are subject to the supplementary corporate income tax policy under Resolution No. 107/2023/QH15, contributing to enhancing the transparency of the policy and facilitating tax management, Article 2 of the draft Corporate Income Tax Law has amended and supplemented the provisions on taxpayers.

Accordingly, in Clause a and Clause d, Paragraph 1, Article 2 of the draft Law, the drafting agency has detailed the objects of taxpayers who are enterprises and establishments based on the legalization of regulations that are being implemented stably in sub-legal documents, and at the same time, edited some wording to ensure consistency and transparency of the policy.

Foreign enterprises must pay tax on taxable income arising in Vietnam

Noteworthy, the draft law amends and supplements the provisions on taxpayers in cases where foreign enterprises, whether or not they have a permanent establishment in Vietnam, have taxable income related or unrelated to the permanent establishment, income from e-commerce activities, and digital business activities. Simultaneously, it assigns the government the responsibility to provide specific guidance on corporate income tax payments in such cases to suit the practical situation and management requirements at each stage.

Specifically, point d, clause 2, Article 2 of the draft law stipulates: "Foreign enterprises without a permanent establishment in Vietnam shall pay tax on taxable income arising in Vietnam, including income from the provision of goods and services through e-commerce and digital platform business activities, regardless of the location of the business. The government shall prescribe specific regulations on the corporate income tax payment of foreign enterprises with income arising in Vietnam as stipulated in this point."

Furthermore, the draft also supplements the provisions on compliance with international treaties in cases where the international treaty to which Vietnam is a party has different provisions on permanent establishment to ensure consistency with the Law on International Treaties as well as the implementation of Vietnam's commitments when participating in relevant international treaties. Accordingly, the draft law stipulates that in cases where an agreement or international treaty to which Vietnam is a member has provisions on permanent establishment different from those stipulated in this Law, the permanent establishment shall be determined in accordance with the provisions of that agreement or international treaty.

At the same time, the draft also supplements the provision that enterprises subject to the provisions of National Assembly Resolution No. 107/2023/QH15 are corporate income taxpayers in the following direction: a constituent unit of a multinational enterprise with a consolidated revenue in the parent company's financial statements of at least 750 million euros (EUR) in at least two of the four consecutive years preceding the equivalent fiscal year, shall pay the supplementary corporate income tax as determined in Chapter IV of this Law, except for government organizations; international organizations; non-profit organizations; pension funds; investment funds as the ultimate parent company; real estate investment organizations as the ultimate parent company; organizations with at least 85% of the value of assets owned directly or indirectly through the aforementioned organizations, and assigns the government to prescribe details of this clause.

According to the Ministry of Finance, the aforementioned amendments and supplements will contribute to enhancing the transparency of the policy, facilitating tax management; ensuring a solid legal basis for the implementation of the collection, payment, and management of taxes for foreign enterprises providing goods and services to organizations and individuals in Vietnam through e-commerce and digital platform business activities, in accordance with international practices; and at the same time, ensure the coverage of taxpayers who are subject to the supplementary corporate income tax policy under Resolution No. 107/2023/QH15.