The method of deduction of deemed tax under the agreement on double taxation avoidance in Vietnam

The method of deduction of deemed tax under the agreement on double taxation avoidance in Vietnam (Image from the Internet)

According to the provisions of Article 49 of Circular 205/2013/TT-BTC guiding the implementation of the agreements on double taxation avoidance and prevention of tax evasion with respect to taxes on income and property between Vietnam and other states or territories and in force in Vietnam issued by the Minister of Finance. To be specific:

In cases where a resident of Vietnam derives income from and must pay tax in the Contracting State to an Agreement concluded with Vietnam (a reduced or exempted tax as a special preference), if, in that Agreement Vietnam commits to apply the method for deduction of deemed tax, when this resident makes income tax declaration in Vietnam,  such income shall be included in his/her taxable income in Vietnam in accordance with Vietnam’s current tax law and the deemed tax amount shall be deducted from the tax amount payable in Vietnam.  The deemed tax amount is the amount which should have been paid by a resident of Vietnam in the Contracting State to an Agreement concluded with Vietnam on the income derived from that Contracting State, which, however, according to that Contracting State’s law, is exempted or reduced as a special preference.

Tax deduction shall comply with the following principles:

a) Tax amount already paid in the Contracting State and deducted must be taxes specified in Agreement;

b) The deducted tax amount shall not exceed the tax amount payable in Vietnam, which is computed on the income derived in the Contracting State in accordance with Vietnam’s current tax law;

c) Tax amount already paid in the Contracting State is the taxes arising in time of taxable year in Vietnam.

Example 71: Vietnamese company Q has a permanent establishment in Uzbekistan.  In 2010, this permanent establishment was determined to have an income of USD 100,000.  According to the tax law of Uzbekistan, this income was exempted from tax as a special preference (in case of non-exemption, it will be taxed at the rate of 33%).  Company Q was obliged to pay tax in Vietnam at the current rate (of 25%).  Under the Vietnam-Uzbekistan Agreement (Clause 5 of Article 24: elimination of double taxation), Vietnam is obliged to deduct the deemed tax (i.e. the tax amount which should have been paid but exempted in Uzbekistan).  In this case, in Vietnam company Q’s tax declaration and payment and deduction of the deemed tax amount shall be as follows.

- Determination of the deemed tax amount paid in Uzbekistan (according to Uzbekistan’s tax law):

USD 100,000 x 33% = USD 33,000

- Determination of the tax amount payable in Vietnam (according to Vietnam’s current tax law):

USD 100,000 x 25% = USD 25,000

So, company Q shall be regarded as having paid, though in fact being exempted from paying, USD 25,000 (out of a total of USD 33,000 computed according to Uzbekistan’s tax law before the preference is granted) and have this tax amount deducted from the tax amount payable in Vietnam (meaning that it does not have to pay tax in Vietnam).

Above is the content of regulations on the method of deduction of deemed tax under the agreement on double taxation avoidance. For more detailed information, you can refer to Circular 205/2013/TT-BTC.

Best regards!