Most exported services will be subject to 10% tax?
The Vietnam Federation of Commerce and Industry (VCCI) has just responded to the Ministry of Finance's official dispatch requesting comments on the Draft Law on Value Added Tax (amended). Accordingly, regarding the issue of value added tax on exported services, the VCCI document stated that Article 9.1 of the Draft amendment will tax most exported services, without allowing a 0% tax rate as before.
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| Article 9.1 of the Draft Law on Value Added Tax (amended) is amended to impose tax on most export services, without allowing a 0% tax rate as before (Illustration photo) |
Export service sectors still enjoy a 0% tax rate, except for international transportation, leasing of means of transport outside Vietnam and some related services. Other service sectors will be subject to corresponding tax rates, basically 10%. The reason for this amendment is that in the past, tax authorities had difficulty distinguishing which revenue came from exported services and which revenue came from services consumed domestically.
According to VCCI, having to pay a 10% tax rate when exporting will make it difficult for Vietnamese foreign service providers to compete with competitors from other countries. Because according to VCCI's preliminary research, other countries all apply a 0% tax rate for exported services and allow businesses to get input tax refunds. In particular, VCCI also said that through preliminary research, it has not found any cases of taxing exported services.
VCCI believes that the growth trend of international trade in services has been taking place strongly in the world for nearly two decades and will likely continue in the coming time, along with the development of the internet and remote working methods.
According to World Bank data, global service exports have increased from over 400 billion USD in the early 1980s to over 7,210 billion USD in 2022. Notably, from 2003 to present, the average growth rate of global service exports has reached over 6.5%. Among the types of exported services, international transport services (enjoying a 0% tax rate in the Draft) account for a large proportion, but this proportion has been decreasing, from 30% in 1982 to 17% in 2020 and has been replaced by telecommunications and information technology (ICT) services. Global ICT service export growth has averaged 12.3% since 2004 and has accelerated since Covid-19.
Currently, service export is a field with great potential for development. Vietnam's service export turnover in 2023 will reach about 20 billion USD, with an average growth rate of about 11% per year, higher than GDP growth. Vietnam is having a service trade deficit of more than 10 billion USD per year. To provide export services, businesses often do not require large investment capital like the manufacturing and processing industry, suitable for a capital-strapped economy like Vietnam. In addition, exporting services on the internet environment today helps promote the country's image and increase the country's soft power.
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| Export of goods has always been an important growth driver for the country, with an average growth rate of nearly 15% per year. Photo: Luc Tung |
Condition appears Open a business abroad to "avoid taxes"
According to VCCI's analysis, Vietnam is a country with an export-oriented economy. Up to now, goods export has always been an important growth driver of the country, with an average growth rate of nearly 15% per year. This result cannot be achieved without mentioning the role of the value added tax policy on exported goods enjoying a 0% tax rate and businesses being refunded input tax.
“Although during the implementation process, there were still cases of some businesses cheating to take advantage of tax refunds, but that cannot deny the great benefits of the 0% export tax policy. The tax sector also encountered many difficulties in combating tax refund fraud in the early stages, but after many years of implementation, with many efforts, this situation has been greatly limited” – the VCCI document clearly stated.
For service exports, the current Law on Value Added Tax allows a 0% tax rate. However, according to VCCI, in reality, many businesses are still subject to a 10% tax rate because tax officials cannot distinguish between domestic consumption services and export services. Also due to this difficulty in implementation, the Draft Law on Value Added Tax (amended) has proposed not allowing exported services to enjoy a 0% tax rate anymore, but instead imposing a 10% tax rate.
Referring to the experience of some other countries in implementing the 0% export service value-added tax policy, VCCI found that countries often apply the principle of enterprises self-declaring, self-responsibility, tax authorities inspecting, checking, detecting and handling violations. To ensure accurate tax declaration, countries also require enterprises to separately account for revenue from domestic and foreign users, using many inspection measures such as data from intermediary platforms (Google, Apple ...), user IP, and bank payment data. This information is collected, classified and managed according to risk.
Many businesses have reported that in recent times, in order to ensure separate accounting for revenue from domestic and foreign users, businesses have been forced to split their products into two versions to supply to two different markets. However, this solution has caused many problems and increased the cost of operating and providing products for businesses.
Currently, the situation of Vietnamese IT enterprises opening businesses abroad is becoming more and more common. In addition to the advantage of raising capital from investors and a favorable business environment, tax issues are also one of the causes of this situation.
“If a business is opened in Vietnam to supply to foreign users, the product will be subject to value-added tax twice for two countries. However, if a business is opened abroad to supply to users in Vietnam, it will only be subject to value-added tax once in Vietnam” – VCCI’s document analyzed.
For all the above reasons, VCCI recommends that the drafting agency maintain the regulation that export services enjoy a 0% tax rate and assign the Ministry of Finance to guide the method of classifying export services and domestic consumption services.
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