Legal Update: Official Letter 1588 on Foreign Contractor Tax On Transfer Of Right To Use Trademark

Following Official Letter No. 10453/BTC-CST dated 27 July 2016 (hereafter referred to as “Official Letter 10453”) responding to specific queries of several provinces and/or contractors on Foreign Contractor Tax (“FCT”) policy regarding the transfer of right to use trademark, the Ministry of Finance of Vietnam (MOF) has recently issued Official Letter No. 15888/BTC-CST dated 07 November 2016 (or “Official Letter 15888”) on the same subject, addressing to all Provincial Tax Departments i.e. raising it to “national scale”.

We summarize a number of important points that should be noted about the implications of this Official Letter 15888 as follows.

- Official Letter 15888 reaffirms the FCT rates applicable to the transfer of the right to use trademark, which comprises 5% of Value Added Tax (“VAT”) and 10% of Corporate Income Tax (“CIT”).

- For transactions concluded before 7 November 2016, on which taxpayers have already declared and paid VAT and CIT, though not in accordance with the guidance of the Official Letter 15888, submission of an amended tax declaration is not required. However, if taxpayers have not declared, or did declare but not yet paid any VAT and CIT, tax treatment as per Official Letter 15888 will be applied.

- Nevertheless, the MOF does not clearly stipulate to as whether this provision be retroactively applied to cases whereby targeted taxpayers have declared the transactions as being not subject to VAT. For example, income of companies outside of Vietnam who are receiving royalty payments from Vietnam are subject to CIT at a deemed rate of 10% to be withheld by the Vietnamese contracting party. It is generally interpreted that such income was not subject to VAT. It is also unclear how far back Official Letter 15888 may reach, in cases where the provision is required to be applied retroactively.

- Please note Double Taxation Agreements (DTA) which cap the tax rate applicable to royalties at 10% (or lower) generally apply only to the CIT component of foreign contractor taxes, not to VAT. If the Vietnamese party has correctly declared VAT on behalf of the foreign contractor, a VAT refund could be possible under certain circumstances. However, if the party did not declare sufficient VAT that refund may be forfeited.

- Also Official Letters 158887 could conveniently be applicable to franchising and other agreements that contain trademark licenses. However, it is conceivable that some tax authorities could apply those principles to other intellectual property rights, such as copyrights in software licenses.

In order to avoid the risk of administrative penalties in future tax audit, it is recommended that taxpayers proactively review transactions under this category, declare and pay additional tax (if required) in accordance with Official Letter 15888. Even though Official Letters are not legal binding but they do contain important guidance. Therefore, consulting with a licensed tax expert or relevant tax authorities on the applicable tax rate in your specific area is well worth.

For further information, please contact Pham & Associates or send your queries to hanoi@pham.com.vn.