Online advertising and training now subject to tax in Vietnam

With the issuance of Circular 60/2012/TT-BTC dated 12 April 2012 (Circular 60) on Foreign Contractor Tax (FCT), income received by a foreign contractor with respect to online advertising and online training is now subject to withholding tax in Vietnam.

Under the prior Circular 134/2008/TT-BTC dated 31 December 2008 (Circular 134), income from advertising and training activities that took place outside of Vietnam were not subject to any withholding tax. According to Circular 134, the FCT regime did not apply to the following entities:

“Foreign organizations or individuals providing the following services for Vietnamese organizations or individuals when such services are performed overseas:

• Advertising and marketing services;…
• Training services…”

Note that Circular 134 was silent as to whether online advertising and online training fell within the exemption, and there was not much guidance on this issue. Presumably, under Circular 134, if online training/advertising was provided by a foreign company and that company did not assign any experts or have any staff or trade representative in Vietnam during the provision of the services, then such activities could arguably be considered as services performed outside Vietnam. In this case, the provision of online advertising/training services would not be subject to FCT in Vietnam.

This question has now been laid to rest by Circular 60. Under Article 4, Point 4, which provides for tax exemption for certain foreign entities, the relevant provision now reads:

“Foreign organizations or individuals providing the following services for Vietnamese organizations or individuals when such services are performed overseas:

• Advertising and marketing services (except advertising and marketing on the internet);…
• Training services (except online training)…”

Thus, according to Circular 60, online training and online advertising services provided by an offshore company to a Vietnamese party will be subject to the FCT in Vietnam. However, there are still practical questions that Circular 60 does not address. Does it matter where the server is located? Does it matter if the end-users who click on the advertisement are not from Vietnam? Does it matter if the Vietnamese trainees go outside of Vietnam to attend the online training?

Note that tax liability under the FCT regime may be affected by an applicable double taxation agreement (DTA) to which Vietnam is a signatory. Under the Business Profits provision (typically Article 7 of the DTA), Vietnam has the authority to tax the profits attributable to a permanent establishment (PE) of a foreign enterprise in Vietnam (pursuant to the OECD Model). For example, Article 7 of the DTA between Singapore and Vietnam provides:

“The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to that permanent establishment.”

Thus, if the foreign enterprise has no PE in Vietnam, then Vietnam does not have the authority to tax the profits of such an enterprise.

The PE provision (typically Article 5 of the DTA) defines a PE to be a fixed place of business through which the business of the enterprise is carried on, and notably includes a place of management, office, factory, workshop, mine, gas or oil well, and building/construction site. Certain DTAs to which Vietnam is a signatory includes a “furnishing of services” provision (UN Model), which provides that the furnishing of services that exceeds a period of time (generally six months) will constitute a PE.

Thus, it is arguable that the provision of online advertising or online training services would qualify for a DTA exemption so long as the service provider has no PE in Vietnam (i.e. the company does not assign any experts or does not have any staff or trade representative in Vietnam during the provision of the services).