What is Withholding tax in Vietnamese enterprises?
When working at companies and enterprises, the actual salary you receive will be the remaining amount after paying insurance and deducting personal income tax. If you have additional income from other units during the year, you must have been notified about the partial deduction of personal income tax before receiving payment of salary and wages. In the case of Vietnamese enterprises in contracts to purchase services from foreign contractors, they need to deduct and declare taxes on behalf of foreign contractors. The above are all common examples of withholding tax – Withholding tax. So what is Withholding tax, what are its basic characteristics? Please learn about Withholding tax (WHT) through the article of S4B Vietnam below.
1. What is Withholding tax?
“Withholding tax” is an English word and translated into Vietnamese as “Tax deducted at source”, for short, it is also called tax collected at source/withholding tax/temporary tax, etc. This is a form of income tax that the tax authority will collect by directly deducting from the amount that the Income Payer pays to the Income Recipient (Based on the Definition of Wikipedia Open Encyclopedia).
Vietnamese tax deduction is the act of the organization or individual paying income to deduct the tax payable from the taxpayer’s income before paying the income (Clause 1, Article 25 of Circular No. 111/2013/TT-BTC).
How Does Withholding Tax Computations Work in Vietnam?
2. Special characteristics of withholding tax
Personal income tax and contractor tax are two common types of withholding tax in Vietnam.
Withholding tax is understood as the income payer must deduct (withhold) at the source of taxable income a tax amount before paying to the income recipient.
The withholding tax is the obligation of the income recipient but is declared and paid by the income payer to the state budget. The payment of the above tax is stipulated by law that the income payer is responsible for deducting and declaring and paying tax on behalf of the income recipient. This is the core, most basic point of “withholding tax”. Enterprises will deduct at the source before payment without collecting the same product purchase price as Value-added tax (VAT) and Goods & Services Tax (GST) because these taxes are often difficult to manage and difficult to recover after payment to individual employees or suppliers, especially when geographical and territorial distances appear when they move to reside abroad.
Taxes deducted at the source facilitate tax collection for the state budget due to the streamlined taxpayer management (only focusing on the income payer, residing in Vietnam); thereby minimizing the risk of tax evasion and tax fraud of taxpayers by “withholding at source”.
Withholding tax has the characteristics of the tax that it must deduct, such as personal income tax, contractor tax (corporate income tax, VAT collected from foreign contractors), which is shown in the method, subject of calculation and payment, level of tax mobilization, social security policies, incentives for public purposes for people…
It should be noted that withholding tax is a name based on the method of tax collection, not a separate tax.
Some examples of withholding tax:
Example 1: Withholding tax at source on income from winnings
Taxable income for personal income from winnings is the prize value exceeding 10 million VND that the taxpayer receives for each winning, regardless of the number of times the individual receives the prize. If an individual wins multiple prizes in a game (at a business or another organization), the taxable income is calculated on the total value of the prizes. The prize-paying entity must deduct personal income tax before paying the income to the individual.
The personal income tax rate for income from winnings is 10%.
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Example 2: Mr. M won a Vietlott lottery prize worth VND 20,110,000,000 and when paying the prize, Viettel Company must deduct at source before paying the prize to Mr. M the tax amount is:
(20,110,000,000 – 10,000,000) x 10% = VND 2,010,000,000.
Example 3: Tax deducted at source for income from inheritance and gifts
Taxable income from inheritance and gifts is the value of the inherited or gifted assets that the individual receives in excess of VND 10 million each time.
The personal income tax rate for income from inheritance and gifts is 10%.
Example 4: Mr. A is given a motorbike worth VND 40 million by company B. Mr. A has completed the procedures to register ownership of this motorbike. Company B will deduct at source the personal income from Mr. A’s gift as: (VND 40 million – VND 10 million) x 10% = VND 3,000,000.
Example 5: Contractor tax
Foreign contractor ABC signs a contract with a Vietnamese party to build a factory Y with a value of VND 2,200 million (price including VAT).
In case the contractor’s contract does not separate the value of each business activity, only stipulates the contract value including machinery, equipment, design services, supervision services, installation instructions, technical training services, and trial operation; if there are not enough documents to prove that the value of machinery and equipment provided for the project has paid VAT at the import stage, the VAT obligation of foreign contractor ABC for the contract value signed with the Vietnamese party is calculated on the entire contract value of the contractor, which is 2,200 million VND and the % rate applied to calculate VAT is 3%.
Therefore, the amount of tax that needs to be deducted at source before paying to the foreign state is:
2,200 million x 3% = 66 million VND
Before paying contractor ABC, the Vietnamese enterprise must deduct the tax of 66 million VND to declare and pay the contractor’s tax to the Vietnamese tax authority.
Through this article, S4B Vietnam hopes that readers will grasp the nature of Withholding tax, thereby correctly understanding this popular tax collection method. For accountants, the support of accounting service like S4B Vietnam in daily work is extremely useful. With an experienced team handling your books, you reduce the risk of costly errors and compliance issues. Contact us today for quick support!
>>>Read more: Simplified tax services for businesses Vietnam: S4B comprehensive support in accounting services and explanations
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