Will Cloud Services Be Subject to VAT and How Vietnam Taxes on Digital Service Provided as Cross Border Transactions?July 25, 2021
The Ministry of Information and Communications has launched a campaign to promote digital transformation using cloud computing with the participation of 11 local service providers.
Experts say digital transformation will help Vietnamese enterprises, especially small and medium-sized ones, adopt a more flexible and cost-effective business model in the post-coronavirus recovery period.
One of the pillars of such a process is cloud computing, the demand for which has been growing steadily in recent years.
A question arises whether a supplier to provide cloud service either onshore of offshore to a Vietnam client would be subject to local VAT. There has yet a clear answer or guidance so far from the tax authorities because of lacking of further definition of what is software services which are defined as non-subject to VAT.
Under the law and regulations on VAT, goods and services subject to VAT are those used for production, trading, and consumption in Vietnam (including those purchased from overseas organizations and individuals), except for the goods and services included in the negative list (i.e. not subject to VAT).
Among others contained in the negative list, there are: “Technology transfers according to the Law on Technology transfers; intellectual property right transfers according to the Law on Intellectual property, Computer software including software products and software services as prescribed by law.” (Art 4 , Circular 219)
Vietnam does not provide clear rules on place of supply, location of data center nor detailed explanation on how to determine a service is consumed in Vietnam, especially in case where the service is performed offshore to a client in Vietnam or provided online. In practice, if a service is performed offshore but its final products, results are for use in Vietnam, then the service is considered as being consumed in Vietnam and thus subject to VAT unless the service is included in the negative list).
In order to determine if a cloud service is subject to VAT, it needs to review if it is treated as a software service or not. There is yet a definition or clarifications any anywhere else in tax regulations. Instead, the Decree 71 guiding on the Law on Information Technology provides a definition of software services to include: (Art 9, Decree 71)
a/ Administration, warranty and maintenance of operations of softwares and information systems;
b/ Software quality counseling, assessment and evaluation;
c/ Software project counseling and formulation;
d/ Software valuation counseling;
e/ Software technology transfer;
f/ System integration;
g/ Assurance of safety and security for software products and information systems;
h/ Distribution and supply of software products;
i/Other software services.”
Legally speaking, any supplier provides a software service contained in above definition will be exempted from VAT. This exemption applies for manufacturing and trading activities. However, a lease of a software will be subject to VAT. Certain rulings have confirmed that website hosting service is taxed at 10% VAT while website design service is not subject to VAT. Given a cloud service is a broad term covering various mixed services (IaaS, PaaS or SaaS) and the current definition of software services under the law is quite limited, it is likely considered as not included in the negative list nor software service list and thus should be subject to VAT unless supplier’s invoice can itemize those service components that are included in the software list. The normal VAT rate is 10%.
Digital services are also a controversial matter and the VAT implication assessment need to be reviewed duly upon an actual service agreement, nature of the service performance, Vietnam tax authorities have faced difficulties in controlling tax obligation of suppliers especially with cross border transactions and payment is normally made via online payment solutions.
Currently, there is no separate digital service tax regime in Vietnam. Instead the principles of VAT regime (as discussed above) applies. In case the supplier is a non-resident, withholding tax (WHT) mechanism would require the buyer’s obligation to withhold the tax and pay on behalf of the supplier. However, in practice for most of digital services provided online under cross border transactions, it has not been well managed by tax authorities. In this respect, the Government has recently issued Decree 126 to enhance a strict mechanism to manage tax obligation of non-resident supplier in providing cross border services to Vietnam. Under the Article 31, commercial banks would have obligations:
“3. Deduct and pay tax on behalf of overseas suppliers that do not have permanent establishments in Vietnam and participate in e-commerce or digital trade with other organizations and individuals in Vietnam (hereinafter referred to as “overseas suppliers”) in accordance with Clause 3 Article 27 of the Law on Tax Administration. To be specific:
a) If the overseas supplier has not registered, declared and paid tax, the commercial bank or PSP shall deduct and pay tax on behalf of the overseas supplier on each product and service paid for by individuals in Vietnam through e-commerce or digital trade activities.
b) General Department of Taxation shall cooperate with relevant authorities in finding and publishing names and websites of overseas suppliers that have not registered, declared and paid tax on goods and services paid for by individuals in Vietnam. General Department of Taxation shall provide these names and websites for commercial banks and PSPs, which will deduct tax from the transaction accounts of these overseas supplies.
c) In case goods and services of the overseas supplier are paid for by card or other methods that cause the commercial bank or PSP to be unable to deduct tax, the commercial bank or PSP shall monitor the amounts transferred to overseas supplier and send monthly reports to General Department of Taxation using the set form provided by the Minister of Finance.
d) Commercial banks and PSPs shall monthly declare and transfer the deducted tax payable by overseas suppliers to state budget using the set form provided by the Minister of Finance.”
As such, the new rules require banks or payment solution providers, under WHT regime, has right to deduct the tax on the payment received by a non-resident supplier providing digital services to Vietnam clients. The WHT rate is generally 5% for VAT component and 5% CIT (or 5% PIT for individual supplier).