Vietnam has also issued a number of circulars providing guidelines for implementing and interpreting these DTAs. Most of the circulars were issued between 1997 and 2000. In 2004, Circular 133, a comprehensive circular covering all articles of the tax treaties in detail, was issued. The Ministry of Finance (MOF) is now planning to replace Circular 133. A draft is in process and is at the stage of receiving public opinions.
Even under Circular 133, taxpayers still encounter many issues during implementation of the relevant tax treaty. The General Department of Taxation (GDT) has issued numerous official rulings for various cases. The most practical issues relate to what constitutes a permanent establishment (PE), who is the actual beneficial owner and to residency status.
Applying for DTA benefits in Vietnam is not an automatic process. Taxpayers are required to self-declare their taxes, so they need to review the facts themselves to determine whether they are eligible for any DTA exemption/reduction.
The next step is the preparation of a notification dossier for submitting to the local tax authorities. The tax authorities will not issue confirmation of eligibility and only make a decision on the eligibility once a tax audit is carried out. This leads to a potential risk for taxpayers if the tax authorities' conclusion differs from what they have self-assessed.
For example, a taxpayer might declare that it does not have a PE in Vietnam and is thus exempt from tax in Vietnam. After an audit, the tax authorities may later conclude that a PE does exist and thus Vietnam has the right to tax. The taxpayer would then have to pay the additional tax, a late payment penalty (0.05% per day), and a fine of normally 10% of the tax shortage. In certain situations, the authorities may deem this as tax fraud and impose an even greater penalty of one to three times the tax shortage.
Under the draft circular, the level of risk could be increased if the MOF includes an article called principles for benefiting from a DTA. The principles are mostly for the purpose of guarding against tax avoidance (anti-avoidance rule). Some of the principles are quite general and are open to the GDT's interpretation, which may lead to unclear guidelines and thus creates more risk for the taxpayer.
According to the draft, unless otherwise stated in the DTA, the GDT would reject a taxpayer's application for DTA benefits in the following instances:
- The tax liability for which the DTA exemption/reduction is applicable for is in excess of the time limit of the statute of limitations of three years from the date of application;
- The contracts or agreements are concluded solely for the purpose of enjoying DTA exemption/reduction; and
- The applicant is not an actual beneficial owner of the income that has created the tax liability for which the DTA exemption/reduction was applied for. The actual beneficial owner can be an individual, a company or an organisation and must be the one who has ownership and the right to control the income, assets or has the right of income generation. The GDT will take into account all the surrounding circumstances that are relevant to the transaction on the basis of substance over form.
Below are cases where the applicant would be considered not to be an actual beneficial owner:
- When a non-resident applicant has the obligation to distribute more than 50% of its income to a resident of a third country within 12 months from the date the income is received;
- When a non-resident applicant does not have or is unlikely to have any business activities except for the ownership of assets or the right to income generation;
- When a non-resident applicant has business activities but the asset value, business scale and/or the number of employees do not correspond with the received income;
- When a non-resident applicant does not have, or is unlikely to have, any right to control or make decisions, and does not bear, or is unlikely to bear, any risk in connection with the income, assets or right to income generation;
- When an agreement of which a non-resident applicant is a lender, royalty assigner or technical service provider to a Vietnamese party covers terms and conditions of another agreement with a third party where the applicant acts as a borrower, assignee of royalty and/or service receiver;
- When an applicant is a resident of a jurisdiction where there is no income tax imposed or income tax is imposed at a rate under 10% which is not for investment encouragement as defined in the DTA; and
- When an applicant is an agent or an intermediary company (except for under authorisation) that is established in a signing state solely for the purpose of tax avoidance or profit remittance and does not participate in any core business activities, including production, commerce and/or provision of services.
If these principles are passed and take effect, taxpayers will need to more carefully analyse their situation before applying for DTA benefits. To avoid the worst case outcome, taxpayers should carry out an in-depth assessment of their DTA eligibility or seek an advance ruling for guidance from the GDT.
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