A project management office (PMO) in Vietnam commonly refers to an office established by a foreign contractor that is registered to operate in the locality where its construction work is carried out. A PMO would operate within the terms of a contract and be dissolved when the contract expires. This form of establishment is commonly selected by the majority of foreign construction companies when doing business with local Vietnamese investors.
In this article, we will provide an overview of the key tax considerations for a PMO in Vietnam.
Registering for a PMO
Under Vietnamese law, a foreign contractor must obtain an operating license for construction and thereafter register to establish a PMO prior to commencement of construction works in Vietnam. A foreign contractor will be granted the operating license if it:
- has won a contract bid with a Vietnamese investor;
- is eligible to execute the contract as prescribed by the Law on Construction;
- enters into a partnership with a Vietnamese contractor or a sub-contract with a Vietnamese sub-contractor, unless the Vietnamese sub-contractor is unqualified to execute any tasks of the contract package;
- meets other requirements as stipulated by the law.
During the operation, a PMO is also required to register for a seal, tax code, and can open a bank account and recruit employees to perform the contract in Vietnam.
Business License Fee
Under the current regulations, a PMO in Vietnam will be subject to a business license fee of 1 million Vietnamese dong ($43) per year from the second year of establishment, as the first establishment year is exempted. The deadline for filing the business license fee declaration is the 30th day of the second year. During operation, a PMO is not required to file a business license fee declaration again, but payment for the annual business license fee has to be made no later than January 30 of the relevant year.
Foreign Contractor Tax
Foreign contractor tax (FCT) is imposed on foreign business organizations or individuals doing business in Vietnam via a contract or an agreement with a Vietnamese party. FCT is not a separate tax, but typically comprises a combination of value-added tax (VAT) and corporate income tax (CIT).
There are three methods to calculate and declare FCT—direct method, deduction method and hybrid method. In practice, a PMO would normally opt to apply the deduction method or hybrid method for declaration and payment of FCT because the establishment of a PMO in Vietnam is considered as a permanent establishment (PE) under the tax laws, where the direct method will not be applicable. Foreign contractors are required to register the selected FCT method to the managing tax authority at the time of tax registration.
This entails the foreign contractor registering for VAT purposes and filing CIT and VAT returns in the same way as a locally based entity. A foreign contractor can apply the deduction method for its PMO if it meets all the requirements listed below:
- it has a PE or is tax resident in Vietnam;
- the duration of the project in Vietnam is more than 182 days; and
- it adopts the full Vietnam Accounting System (VAS), completes a tax registration and is granted a tax code.
Under this method, VAT is declared and paid on a crediting basis (i.e. output VAT less input VAT) where CIT is paid at 20% on net profits.
If a foreign contractor carries out multiple projects in Vietnam, establishes multiple PMOs, and qualifies for application of the deduction method for one project, that contractor is required to apply the deduction method for its other projects as well.
The hybrid method allows foreign contractors to register for VAT and accordingly pay VAT based on the deduction method (i.e. output VAT less input VAT), but with CIT being paid under the direct method rates on gross turnover.
A foreign contractor that wishes to adopt the hybrid method for its PMO must:
- have a PE in Vietnam or be tax resident in Vietnam;
- operate in Vietnam under a contract with a term of more than 182 days; and
- maintain accounting records in accordance with the accounting regulations and guidance of the Ministry of Finance.
CIT being a portion of FCT, rates under the hybrid method vary depending on certain kind of services and goods supplies. In the context of construction, common tax rates are:
- supply machine and equipment: 1%
- construction, installation; other business or transport: 2%
- service and interest (if any): 5%
- copyright: 10%
It is worth noting that for construction and/or installation projects, including the supply of material or machinery and equipment, if each of the components is inseparable then CIT of 2% will be applied on the whole contract value.
Personal Income Tax
Under the labor laws, either Vietnamese employees or expatriate employees are eligible to be recruited by a PMO, or by its parent foreign investor. A person earning income in Vietnam (no matter whether it is paid in Vietnam or abroad and regardless of nationality) is obliged to pay personal income tax. The taxable income and the applicable tax rates are dependent on whether the individual is a resident or nonresident in Vietnam.
Non-tax residents are taxed at 20% on their Vietnam-sourced income and tax residents are taxed at the progressive rates with up to 35% on their worldwide income.
Before and during operation of a PMO, foreign contractors should be aware of the following which could trigger potential risks/issues.
- A foreign contractor should carefully consider which method of FCT compliance to apply. Each method of declaration has its advantages and disadvantages in consideration of business arrangement with the locally based investor, liability for a project’s costs, internal accounting principles, administration burden, etc. In practice, the hybrid method is more commonly chosen by foreign contractors under contracts where a significant liability of costs is on the foreign contractors. Application of a suitable method can bring significant benefits to a PMO from a management viewpoint.
- Common issues that could lead to tax exposure include purchase and importation of machinery and equipment serving for a project, separation of contract value between contractor and sub-contractors, expenses management, invoicing on completion of the phases of the construction, etc. Foreign contractors are advised to equip themselves with the necessary knowledge of local business practices and accounting and tax principles in order to avoid business misconceptions and an unfavorable tax burden.
- As a PMO will be closed upon completion of service, procedures for closing the PMO should be well-planned and properly implemented to ensure a smooth exit of the business. Incorrect application of tax rates, incorrect timing of declaration and payment, or lack of supporting documents can potentially lead to tax arrears, late payment interest and administrative penalty imposed by the tax authority at the time of tax audit.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
This article provides general comments and recommendations in accordance with current Vietnamese laws and regulations in effect as of the publication date. For specific circumstance, readers should seek proper advice with respect to the topic discussed herein.
Valerie Teo is a Tax Partner and Nguyen Tan Tai is a Tax Manager with Grant Thornton Vietnam.