EXERCISE 1 – DETERMINE FCT LIABILITY

The Tusho Construction Company (Tusho Japan) is a large Japanese resident engineering
company, contemplating submitting a tender to Nam A Co Ltd (Nam A), a company incorporated
and resident in Vietnam for the construction and assembly of Nam A’s new bottle production line
in Ho Chi Minh City. The tender price is expected to be in the region of USD20 million.

If the tender is successful, Tusho Japan is planning to sub-contract a part of the actual
construction and assembly work to its subsidiary in Vietnam (Tusho Vietnam). All of the
engineering design works will be carried out by Tusho Japan outside of Vietnam. Tusho Japan
will also supply equipment to Nam A at Ho Chi Minh City Port and Nam A will import this
equipment under its name. Three engineers of Tusho Japan will be sent out to Vietnam to
supervise the construction and assembly for approximately four months.
The following are the estimates for the project (all values are stated gross of any applicable
taxes):

USD’000
Design fee 2,000
Supply of equipment (CIF, Saigon Port) 10,000
Supervision service fee 2,000
Construction and assembly works (sub-contracted to Tusho Vietnam) 6,000
–––––––
Total 20,000
–––––––

Required:
Compute (in USD) all the Vietnam tax liabilities arising on the Tusho Construction Company in
respect of the proposed tender, giving explanations of your treatment of each of the items
included in the project estimate.
Note: you are not required to convert your answer to VND.
Answer:
Deemed VAT:

The supply of equipment will only be subject to VAT at the import stage by Nam A. As Tusho
Japan will enter into a contract with a Vietnamese sub-contractor for the construction and
assembly works, the VAT-taxable turnover of Tusho Japan will not include the value of the work
to be implemented by the sub-contractor (Tusho Vietnam) of USD6 million.

Therefore, the VAT-taxable turnover of Tusho Japan will comprise:

– Design fee: USD2,000,000
– Supervision service fee: USD2,000,000

The deemed VAT payable is therefore:

– Design service: USD2,000,000 x 50% x 10% = USD100,000
– Supervision service: USD2,000,000 x 50% x 10% = USD100,000

Deemed CIT
As the supply of equipment is accompanied by services provided in Vietnam, the CIT-taxable
income of Tusho Japan will be the total value of the equipment and services.

However, as Tusho Japan will enter into a contract with a Vietnamese sub-contractor the CIT-
taxable turnover of Tusho Japan will not include the value of the construction and assembly work
to be implemented by the sub-contractor (Tusho Vietnam) of USD6 million.
As the proposed tender separates out the value of equipment and other services, CIT will be
calculated
separately at different deemed tax rates on the value of each item.

Therefore, the CIT-taxable turnover of Tusho Japan will comprise:

– Design fee: (USD2,000,000 - USD100,000)
– Supervision service fee: (USD2,000,000 - USD100,000)
– Supply of equipment: USD10,000,000

The deemed CIT payable is therefore:

– Design service: (USD2,000,000 – 100,000) x 5% = USD95,000
– Supervision service: (USD2,000,000 – 100,000) x 5% = USD95,000
– Supply of equipment: USD10,000,000 x 1% = USD100,000

Based on the above, the total FCT imposed on the proposed tender will be USD490,000

Other notes:

(i) PE exposure.
(ii) Other expenses paid to three engineers of Tusho Japan who will be sent out to Vietnam to
supervise the construction and assembly for approximately four months (if any).
(iii) How to record the expenses incurred into the Vietnamese party’s accounting book.
EXERCISE 2 – DETERMINE FCT LIABILITY (DECEMBER 2017 – Q3)

MCNR Co is a European company specialising in machinery for the pulp and paper industry. In
2016, MCNR Co received a request for proposal (RFP) from SGPP JSC, a company in Vietnam,
for the construction of a paper factory in Dong Nai, Vietnam.

The RFP requires that bidders quote a price which is gross of the corporate income tax (CIT)
portion and net of the value added tax (VAT) portion of the foreign contractor tax (FCT) payable
in Vietnam.

Based on its experiences from prior projects in Vietnam, MCNR Co estimated that the value net
of all withholding taxes which it would expect to receive from the project would be as follows:

Items Value net-of-tax (USD) Notes

Machinery and 45 mil This amount can be broken down into:
equipment machinery and equipment with a value of
USD42 mil, and a one-year guarantee
with a value of USD3 mil.
MCNR Co estimated that it would
purchase spare parts for the machinery
and equipment with a value of USD2 mil
from MCEQVN, an affiliate of MCNR Co
in Vietnam.
Design and engineering 8 million
services
Construction and 15 mil MCNR Co will sign a contract to
installation subcontract the installation works valued
at USD4 mi to MCSIVN, a subsidiary of
MCNR Co in Vietnam.
Supervision 4 mil
Commissioning 1 mil
Technical training 2 mil To be performed in Vietnam by personnel
dispatched from Europe by MCNR Co.
Total 75 mil

Required:

(a) State whether the cost of the spare parts to be purchased from MCEQVN and the value of the
services to be subcontracted to MCSIVN will be deductible from taxable revenue when
determining the foreign contractor tax (FCT) liability of MCNR Co.

(b) Calculate (in USD millions, rounded to two decimals) the contract price to be quoted by
MCNR Co as required in the request for proposal (RFP) and the potential FCT which will be
withheld from the payments made to MCNR Co if the parties agree to break down the value of
each item in the contract.

(c) Calculate (in USD millions, rounded to two decimals) the contract price to be quoted by
MCNR Co as required in the RFP and the potential FCT which will be withheld from the
payments made to MCNR Co if the parties agree to state a lump sum price in the contract.
EXERCISE 3 – DETERMINE FCT LIABILITY (DECEMBER 2018 – Q3)

Agado is a company headquartered in Hong Kong providing an online travel booking platform.
Subscribers to the platform (i.e. clients) can book hotel rooms worldwide, at a rate which is lower
than the usual quoted price of the hotel.

In 2017, Agado entered into an agreement with TSQR Co, a luxury hotel company in Vietnam.
As part of the agreement, TSQR Co will provide a 20% discount from the quoted price to clients
who book rooms at the hotel via Agado. In addition, TSQR Co will pay Agado a referral fee of
15% of the room charge paid by clients. The referral fees receivable by Agado will be net of any
Vietnamese withholding tax. The agreement provides two different mechanisms for collecting
money from Agado clients:

– Clients can pay rent for a booked room to Agado via credit card or other online payment
mechanism (such as PayPal). Agado then settles the residual rent after deducting the referral fees
to TSQR Co; or

– Clients can pay the rent directly to TSQR Co for each booking made with Agado, and TSQR
Co pays the referral fees due to Agado. In 2017, TSQR Co received USD2·38 million from
Agado and VND45,600 million directly from clients for room bookings made through Agado.
TSQR Co recently obtained confirmation from the local tax authorities that the activities of
Agado would be treated as ‘services’ for foreign contractor tax (FCT) purposes in Vietnam.

Required:

(a) Calculate (in VND million) the foreign contractor tax (FCT) which TSQR Co should declare
on its FCT return for 2017 in respect of the agreement with Agado.

(b) (i) State the circumstances in which Agado may be exempt from the corporate income tax
(CIT) portion of FCT in Vietnam in accordance with the double tax agreement (DTA) between
Hong Kong and Vietnam. Note: You should assume the DTA follows the general guidance
regarding implementation of double tax treaties in Vietnam.
(ii) Briefly explain the initial procedures to be implemented for the DTA exemption to apply.
EXERCISE 4 – DETERMINE FCT LIABILITY (JUNE 2018 – Q3)

INTSP Co, a Vietnamese company, entered into the following transactions with foreign partners
in the year 2017:

Transaction 1: In March 2017, INTSP Co leased a specialised vehicle from LSPC Co, a Germany
company, for the period from 1 April to 31 December 2017 for USD900,000 net of all
withholding tax in Vietnam. The rental covered the following expenses for which LSPC Co
obtained documents and presented them to INSTP Co:

– expenses of USD20,000 for negotiating the contract with INTSP Co;

– vehicle insurance of USD24,000 per annum; and
– transportation costs to Vietnam of USD30,000.

The operation of the vehicle requires special skills and LSPC Co assigned an expert to Vietnam to
operate the vehicle from 1 April to 30 September 2017. LSPC Co has sufficient documents to
prove that it paid this expert USD10,000 per month.

Transaction 2: In November 2017, INTSP Co entered into an agreement to act as the shipping
agent in Vietnam for D-Line, a Danish maritime shipping line. According to the agency
agreement, INTSP Co is responsible for receiving goods from Vietnamese customers for
international shipping, issuing bills of lading and collecting freight on behalf of D-Line in
Vietnam.

In December 2017, D-Line accepted an order from MCT Co, a Vietnamese customer, to ship
goods from Vietnam to Brazil for a freight cost of USD120,000 plus a surcharge of USD40,000
for over-sized goods (both amounts inclusive of all taxes in Vietnam). As requested by D-Line,
INTSP Co leased a vessel from a Vietnamese company to transport the goods from Vietnam to
Singapore (a hub of D-Line in Asia) from where the goods would be shipped on to Brazil. The
shipping freight cost from Vietnam to Singapore was USD30,000.

Required:

(a) Calculate (in USD) the corporate income tax (CIT) portion of the foreign contractor tax (FCT)
which INTSP Co should declare in its FCT return for 2017 in respect of the leasing contract with
LSPC Co.

(b) (i) Briefly explain the principle to be applied when determining the taxable revenue for a
shipping line such as D-Line.
(ii) Calculate (in USD) the FCT which INTSP Co should declare in its FCT return for 2017 on
behalf of D-Line in respect of the shipping order from MCT Co.
EXERCISE 5 – DETERMINE FCT LIABILITY (JUNE 2019 – Q3)

ALPB Co is a company with global operations and is headquartered in Ireland. The company
provides various online services, most notably search engines and cloud services. A key source of
income for ALPB Co is the sale of online advertisement services for companies and websites,
under the service package name of G-Ads.

In 2018, ALPB Co appointed AVN Co, a Vietnamese company, to act as its distributor in
Vietnam in order to expand its G-Ads services. Under the distribution agreement, AVN Co
identifies customers in Vietnam who have the need for G-Ads, enters into contracts for
advertising with the customers and collects fees on behalf of ALPB Co. The collected fees are
then remitted to ALPB Co by AVN Co after deducting their service fee based on 20% of the
collected amount. The remittance is also net of any withholding tax which may be applicable to
ALPB Co in Vietnam.

In 2018, AVN Co remitted a net amount of USD16 million to ALPB Co. In addition, AVN Co
are liable to pay an amount of USD450,000 to ALPB Co for using its cloud services in 2018.
However, the distribution agreement allows this amount to be offset with an amount of
USD600,000 which is due to be paid by ALPB Co to AVN Co towards their initial expenses
incurred in promoting the G-Ads service in Vietnam. Both parties would finalise any remaining
amount due in 2019.

In addition, during 2018, ALPB Co collected substantial fee income for the provision of cloud
services to various corporate subscribers in Vietnam. According to its standard contract with
users, ALPB Co requires any withholding tax in Vietnam to be borne by the user. Note: You
should assume that the tax authorities in Vietnam accept cloud services as ‘software services’.

Required:

(a) Briefly explain whether the services (G-Ads and cloud services) provided by ALPB Co to
users in Vietnam would be subject to foreign contractor tax (FCT), and the administrative and
payment requirements for this tax. Note: No calculations are required in this part.

(b) Calculate (in VND million) the FCT which AVN Co should declare on its FCT return for
2018 in respect of its payment of the net amount of USD16 million to ALPB Co.

(c) Determine whether AVN Co should declare FCT in 2018 for the fee of USD450,000 for cloud
services provided by ALPB Co, and calculate (in VND million) the total FCT liability, if any.
EXERCISE 6 – DETERMINE FCT LIABILITY (JUNE 2017 – Q3)

Mark Anderson is the chief financial officer (CFO) of EZ-Trading Co, which is established in
Vietnam as a distributor of various products in Vietnam for foreign suppliers. At the end of 2015,
after attending a tax update by a tax consulting firm, Mark became concerned about the foreign
contractor tax (FCT) risks from some contracts with foreign suppliers which EZ-Trading Co
renewed in 2015. When the contracts were originally signed (all before 2014), FCT had never
been an issue, as the foreign contractors were viewed as having no business activities in Vietnam.

On reviewing the contracts, Mark identified the following clauses as potentially exposing EZ-
Trading Co to having to bear FCT for the foreign suppliers.

Foreign supplier Product Concerning provisions

OCL Co (a US Virtual reality OCL Co bears the risks of the goods until the time the
company) devices devices arrive at the Vietnam border gate. EZ-Trading Co is
responsible for customs clearance and transportation from
the Vietnam border gate to its own warehouse.

OCL Co has the right to determine the selling price of the

products each time in Vietnam.

OCL Co gives a guarantee period of one year for faulty

products. EZ-Trading Co is to ship back the faulty goods to
OCL Co overseas for replacement
MBN Co (a Luxury MBN Co bears the risks of the goods until the time the
Swiss company) watches watches arrive at EZ-Trading Co’s bonded warehouse in
the port, at the border gate. EZ-Trading Co is responsible
for customs clearance

MBN Co retains ownership of the luxury watches until they

are sold to a third-party buyer.

MBN Co bears the costs of advertising the watches

incurred in Vietnam. Subject to the instructions of MBN
Co, EZ-Trading Co signs contracts with the advertising
firms and makes advance payments and then invoices these
back to MBN Co.

In addition to the above, EZ-Trading Co also has the following arrangements with its parent
company (EZ-International Co) which is headquartered in Singapore:

Foreign supplier Services Description

ADT Co (located Advertising As a group policy, EZ-Trading Co is required to share
in Singapore) advertising costs with various other subsidiaries of EZ-
International Co in the region. The parent company enters
into a contract with ADT Co (which indicates EZ-Trading
Co and other subsidiaries as the participants to the contract)
and pays advertising expenses centrally to ADT Co, then
invoices EZ-Trading Co and the other subsidiaries their
 allocated fee. The advertising is conducted via the internet
and the allocation to EZ-Trading Co is mainly for the
display in the Vietnamese language.
TNL Co (located Training EZ-International Co has signed a master agreement with
in the UK, with branches in Vietnam) with TNL Co for various training
branches in courses (which identifies EZ-Trading Co and certain other
Vietnam) subsidiaries as the participants to the master agreement).
TNL Co organises the courses for EZ-Trading Co and the
other subsidiaries of EZ-International Co in Asia. Some
courses are organised in Vietnam specifically for EZ-
Trading Co, other courses are organised in other countries
for both EZ-Trading Co and other subsidiaries.

Required:

(a) Analyse the concerning provisions in the agreements with foreign suppliers, and advise Mark
whether EZ-Trading Co will be required to withhold and pay foreign contractor tax (FCT) on
behalf of the foreign supplier from the activities in the agreements with OCL Co and MBN Co
respectively. If withholding of tax is required, advise Mark of the LIKELY APPLICABLE FCT
rate(s).

(b) State, giving reasons, whether ADT Co and TNL Co would be subject to FCT in Vietnam in
respect of the advertising and training services provided in relation to EZ-Trading Co under the
agreements signed with EZ-International Co in Singapore. Note: You are not required to specify
the rates of withholding in part (b).