Value-added tax (VAT), is an indirect tax that is added to the selling price of products and services and is paid by the customer when the product is used. Although the customer pays the VAT, the person who directly meets the State’s tax duty is the production and business unit.

To have a better understanding, let’s look at some key components of Vietnam’s VAT, such as which items and services are taxed, how VAT is calculated, and other duties enterprises must meet.

Introduction to Vietnam VAT

In Vietnam, all organizations and individuals that produce, trade, or provide goods and services are subject to VAT. Furthermore, any company or person that imports goods or purchases services from overseas also needs to pay VAT.

Taxable Products

Generally, all types of goods and services used for production, trading, and consumption in Vietnam are subject to VAT, except for those that are defined as non-taxable products.

Non-taxable Products

Specifically, the following products are exempt from Vietnam VAT:

– Products from cultivation and husbandry, aquatic products (not yet been processed) when sold directly by the producing organizations or when imported;

– Other products that relate to agriculture;

– Transfer of rights to use land;

– Insurance services;

– Financial or banking services or securities trading (stock/share);

– Healthcare services for humans and animals;

– Public transportation by bus and tramcar;

– Specific types of imported machinery, equipment, materials, or facilities that cannot yet be produced or manufactured in Vietnam;

– Transited goods in Vietnam; goods temporarily imported for later re-export or vice versa; raw materials imported for the production or processing of later-exported goods under contracts signed with foreign parties; goods and services traded between foreign countries and non-tariff areas or between non-tariff areas;

– Transfer of technology under the law of technology transfer; transfer of rights to own intellectual property under the law of intellectual property; computer software;

– Gold under the forms of bar and ingot;

– Goods and services of business households/individuals whose yearly revenue is no more than 100 million VND;

– Other types of products.

Vietnam VAT Rates

In general, there are three VAT rates for different kinds of goods or services in Vietnam.

 0% VAT Rate

This rate applies to exported goods and services, international transportation, and non-taxable products upon exportation except for:

– Overseas transfer of technology or rights to own intellectual property;

– Overseas reinsurance service;

– Credit provision service;

– Transfer of capital;

– Derivative financial service;

– Telecommunication service;

– Unprocessed mined resources and minerals or any product in which the market value sum of mined resources, minerals and energy cost accounts for 51% or more.

5% VAT Rate

The following goods and services are subject to the VAT rate of 5%:

– Clean water for production process or domestic use;

– Medical equipment and tools; medical cotton and bandage; preventive and curative medicines; pharmaco-chemistry products and pharmaceuticals used for the production of curative and preventive medicines;

– Teaching and learning aids;

– Exhibition, cultural, physical, and sports activities; art performances; film production; import, distribution, and screening films;

– Toys for children and certain kinds of books;

– Scientific and technological services under the law of science and technology;

– Sales and lease of social housing;

– Various goods and services that relate to agriculture, aquaculture, cultivation, and forestry.

10% VAT Rate

Other than products that are subject to the VAT rates of 0% and 5%, all other types of goods and services are imposed on a 10% rate.

Two Methods to Calculate VAT in Vietnam

In fact, there are two methods for Vietnam VAT calculation, which are credit method and direct method.

Credit Method

This method applies to business entities that fully comply with regulations on accounting, invoices, and documents.

Particularly, you can use this method if your business entities:

– Have yearly revenue reaching 1 billion VND or above from trading goods or providing services, excluding business households or individuals;

– Register voluntarily for the credit method, excluding business households or individuals.

Once you select this method, you must maintain it for 2 consecutive years.

In brief, you can calculate your payable VAT amount as follows:

Payable VAT amount = Output VAT – Creditable Input VAT

GLOSSARY

– Output VAT is the total amount of value-added tax on sold goods and services indicated in the added-value invoice (or red invoice in Vietnam).

– Creditable Input VAT is the total amount of value-added tax on purchased goods and services indicated in the added-value invoice or the total amount of value-added tax on imported goods indicated in the added-value document.

Some notes on the issue of crediting input VAT include:

– The amount of input VAT on purchased goods and services can be wholly credited.

– If the input VAT is imposed on goods and services used for the production of both taxable and non-taxable products, only the proportion used for taxable products is creditable. Business entities are responsible for the task of calculating this proportion.

– An amount of input VAT on goods and services sold for humanitarian aid purposes or used for petroleum exploration can be wholly credited.

In order to credit input VAT, your business entities must have:

– VAT invoices of purchased goods and services or VAT payment documents of imported goods.

– A non-cash payment document of purchased goods or services valued at 20 million VND or more.

– Contracts signed with foreign parties, invoices, non-cash payment documents, and customs declarations for exported goods and services.

Below are some notes on invoices in Vietnam:

– VAT invoice is called red invoice in Vietnam.

– According to Circular 68/2019/TT-BTC, all businesses must issue electronic invoices (with or without tax verification) when selling goods or services to buyers. Businesses register e-invoicing with the General Department of Taxation. Electronic invoicing will become mandatory from the beginning of November 2020.

Direct Method

Overall, you need to apply the direct method if you fall under a specific category.

In summary, these categories include:

– Enterprises and co-operatives that have yearly revenue less than 1 billion VND or do not voluntarily register for credit method;

– Business households and individuals;

– Foreign organizations and individuals that do not have a permanent establishment in Vietnam but have income arising within this nation and have not fully complied with regulations on accounting, invoice, and document (except those engaging in exploring and exploiting oil or gas);

– Enterprises engaging in trading in gold, silver, and precious stones;

– Other economic organizations.

Following the direct method, you can calculate your payable VAT amount as follows:

Payable VAT amount = Revenue x Regulated rate (%)

The regulated rate (%) varies in different sectors, which specifically include:

– Distribution and provision of goods: 1%

– Services and construction without material provision: 5%

– Manufacture, transportation, services with attached goods, construction with material provision: 3%

– Others: 2%

Please do note that the above formula does not apply to trading or producing golds, slivers, and precious stones.

Instead, you can use the following formula:

Payable amount = Bid-ask Spread x Regulated VAT rate for these products

If you’re running a company in a foreign jurisdiction but provide goods and services in Vietnam, your company might be subject to Vietnam Foreign Contractor Tax.

(Source: Reference)