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TAX DEPARTMENT
TAX DEPARTMENT OF THANH HOA PROVINCE
No: 966 /CT-TTHT
Subject: Foreign Contractor Tax Policy on Penalties for Delay in Unloading Goods Paid to Foreign Shipping Companies
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SOCIALIST REPUBLIC OF VIETNAM
Independence - Freedom - Happiness
Thanh Hoa, February 18, 2025
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To:
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Nghi Son 2 Power Company Ltd.
Address: Ha Bac Village, Nghi Son Economic Zone, Hai Ha Commune, Nghi Son Town, Thanh Hoa
Tax ID: 2802122729
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The Tax Department of Thanh Hoa Province has received document No. NS2PC-THTD dated December 23, 2024, from Nghi Son 2 Power Company Ltd. (hereinafter referred to as NS2PC or the Company), inquiring about the foreign contractor tax policy regarding penalties for delays in unloading goods paid to foreign shipping companies. In response to this issue, the Tax Department provides the following comments:
Clause 25, Article 3, of the Tax Administration Law No. 38/2019/QH14 of 2019, stipulates that the principle of the substance of the activity or transaction determines the tax obligation, which is applied in tax management.
According to Circular No. 103/2014/TT-BTC dated August 6, 2014, by the Ministry of Finance, which guides the tax obligations for foreign organizations or individuals doing business in Vietnam or earning income in Vietnam:
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Clause 1, Article 1 defines the applicable subjects:
“Foreign organizations conducting business with or without a permanent establishment in Vietnam; foreign individuals conducting business who are residents or non-residents of Vietnam (collectively referred to as foreign contractors or foreign subcontractors) who do business in Vietnam or have income arising in Vietnam based on contracts, agreements, or commitments between the foreign contractor and a Vietnamese organization or individual, or between the foreign contractor and foreign subcontractor to perform part of the contractor's work.”
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Article 7 stipulates the taxable income for corporate income tax (CIT):
“1. The taxable income of foreign contractors and foreign subcontractors is income arising from the provision and distribution of goods; provision of services, or services related to goods in Vietnam based on contractor contracts, subcontractor contracts (except in cases specified in Article 2, Chapter I).
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Income arising in Vietnam of foreign contractors and foreign subcontractors includes any income received in any form based on contractor contracts or subcontractor contracts (except in cases specified in Article 2, Chapter I), regardless of the location where the foreign contractors or foreign subcontractors conduct their business. The taxable income for foreign contractors and foreign subcontractors in specific cases is as follows:
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Penalties or compensation received from a partner violating the contract.”
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Article 11 stipulates the subject and conditions for application:
“Foreign contractors and foreign subcontractors who do not meet one of the conditions specified in Article 8, Section 2, Chapter II, must have the Vietnamese party pay the tax on their behalf, as guided in Articles 12, 13, Section 3, Chapter II.”
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Article 13, Section 3, Chapter II, guides corporate income tax for foreign contractors and foreign subcontractors applying the direct method.
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Article 13 provides guidance on corporate income tax:
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The percentage of corporate income tax calculated on taxable revenue
a) The percentage of corporate income tax calculated on taxable revenue for business sectors:
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No. |
Business Sector |
Corporate Income Tax Rate (%) on Taxable Revenue |
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... |
... |
... |
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5 |
Manufacturing; other business activities, transportation (including cross-border transport, air transport) |
2% |
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... |
... |
... |
…
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Corporate Income Tax (CIT) on compensation received from a partner who breaches the contract when the compensation amount exceeds the actual damage, and there is taxable income:
For the income from the compensation for damages received, the foreign contractor has the option to declare and pay CIT either based on the CIT rate applied to taxable revenue or based on revenue and expense declaration, with the standard tax rate.
According to Clause 1, Article 5 of Circular No. 219/2013/TT-BTC, there are cases where VAT does not need to be declared or paid.
Based on the above regulations and the description provided by the company in its inquiry, in the case where Nghi Son 2 Power Company Limited has signed a contract for the import of coal with the foreign shipping company Oldendorff Carriers GmbH & Co.KG (hereinafter referred to as Oldendorff), if Oldendorff receives payment as a penalty or compensation for delays in unloading cargo due to exceeding the agreed ship laytime, the income received by Oldendorff falls under the subject of contractor tax as stipulated in Article 1 of Circular No. 103/2014/TT-BTC; specifically:
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VAT: Not required to declare or pay VAT.
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CIT: Determined according to the regulations in Article 13, Section 3, Chapter II of Circular No. 103/2014/TT-BTC dated August 6, 2014 by the Ministry of Finance (as mentioned above). The CIT rate, when applying the direct method, is specified in point a, Clause 2, Article 13, Section 3, Chapter II of Circular No. 103/2014/TT-BTC dated August 6, 2014 by the Ministry of Finance (as mentioned above). If Oldendorff does not meet any of the conditions specified in Article 8, Section 2, Chapter II, then the Vietnamese party must pay the tax on behalf of the foreign contractor.
The Tax Department responds for Nghi Son 2 Power Company Limited to be informed, based on the actual activities and documents arising, and to comply with the legal provisions as cited in this document. In case of further issues, the company is advised to contact the Inspection Department No. 3 of the Thanh Hoa Tax Department for guidance and resolution.
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Recipient:
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As above;
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Inspection Department No. 3;
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Archive: VT, TTHT.
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On behalf of the Director General
Deputy Director General
Mai Đinh Tu
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