On August 6, 2014, the Ministry of Finance issued Circular No. 103/2014 / TT-BTC (Hereinafter referred to as "Circular 103"), be effective from 1 October 2014, guiding the implementation of tax obligations applicable to foreign organizations and individuals doing business or earning income in Vietnam (hereinafter referred to as "contractor tax"). Accordingly, any foreign organization or individual that sells goods under the terms of delivery of the International Trade Terms (INCOTERMS) shall be liable to the seller for the risk and expense of bringing the goods to the territory of Vietnam. South (including bonded warehouse) is considered to be subject to contractor tax and is obliged to pay the contractor tax at the rate of 1% on the invoice value / value of goods. That means that if a foreign seller sells goods at bonded warehouses (including those sold to Vietnamese businesses and sold to other foreign organizations in the bonded warehouse), the foreign seller is considered as having business activities and have income arising in the territory of Vietnam and be subject to contractor tax. This interpretation does not seem to be consistent with the international definition of bonded warehouses, which is legally a separate area within the Vietnamese territory. The relationship between the bonded warehouse and the area outside the bonded warehouse is the import-export transaction. If goods from foreign countries are deposited in bonded warehouses legally, such goods are not actually imported into Vietnam and the ownership of goods remains outside the territory of Vietnam.

Since the effective date of Circular 103, the number of goods deposited in bonded warehouses for domestic production and export decreased by about 50%, seriously affecting the competitiveness of the logistics industry and branches. Other key export items such as textiles, footwear and plastic of Vietnam. The purpose of the contractor tax is to increase the tax revenue for the state, but the actual application leads to tax reductions in other items such as corporate income tax, value added tax, which is estimated at $ 91 million ( Therefore, following the letter of recommendations dated February 26, 2015 and May 25, 2016 to the Ministry of Finance of member businesses, the association recommends the Government’s Office to submit a report to the Government’s Prime Minister for the study and review of the contractor's tax policy for the reasons summarized below and described in detail in the attached appendix.

Impact of the contractor's tax policy:

First, contractor tax reduces the competitiveness of some key export sectors in Vietnam such as garment, footwear and plastic. The negative impact of contractor taxation has led businesses to limit their shipments at bonded warehouses and switch to delivery at Vietnamese ports and / or at bonded warehouses of neighboring countries to avoid taxation, make waiting time of domestic enterprises for suppliers to produce materials and transport to Vietnam increased, while all three sectors have a high rate of imported materials from 70 % - 80%. At the same time, with the apparel industry we are having a disadvantage in terms of order fulfillment (Vietnam is 90-100 days, India and China about 40-50 days), labor price (be higher than India, Cambodia, Pakistan, Bangladesh and Sri Lanka with a purchasing power index, which have a direct impact on the competitiveness of the sector.

Secondly, contractor taxation is contrary to the objective of Decision No. 200 / QD-TTg dated February 14, 1977 approving the action plan to improve competitiveness and development of logistics services. By 2025, "the service growth rate will be 15% -20%, logistics costs will be reduced to 16% -20% of GDP", "Maximize the advantage of strategic geographic location, This will make Vietnam become a hub of regional logistics.

• In fact, there are bout 50% of businesses which do not send their goods to bonded warehouses since the contractor tax is applied and transferred to another form as mentioned above. Reducing the amount of goods deposited in bonded warehouses will lead to reduce storage services, warehousing, customs clearance, transportation, etc., and will contribute to reducing the growth rate of logistics services. . While businesses have invested heavily in the development of bonded warehouse in recent years. Currently, the bonded warehouse in the whole country has an area of 1,279,984 m2. Binh Duong Province has 15 bonded warehouses. Therefore, it is very difficult for Vietnam to maintain its current logistics growth rate at 16-20% per year as well as to maintain its growth target to 2020.
• In order to become a logistics center of the region, Vietnam should first develop infrastructure systems such as seaports, airports, distribution centers; The second is the connection services from carriers, aircraft, transport service providers, importers and exporters; The third is the system of legal procedures in accordance with international standards and policies promote more advantageous than other countries in the region. However, with the negative impact of contractor tax as analyzed and created difficulties in legal procedures hinder the process of turning Vietnam into a regional logistics.

• With the taxation of the contractor, the manufacturing company has to place orders directly from abroad instead of taking the goods from the bonded warehouse, so the time will increase by an average of 2 months and it will not be possible to shorten the transit time of goods.
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• Third, the goal of contractor tax is to increase the tax revenue for the state budget, but the actual implementation has led to that the Government is losing the revenue of the Corporate Income Tax, the Personal Income Tax and the Value Added is calculated about US$ 91 million in three categories:

•  US$ 7 million of Corporate Income Tax from the case that businesses will increase profits without having to pay bank interest when taking goods from the bonded warehouse.
•  US$ 1 million of  Corporate Income Tax and Personal Income Tax from the case that businesses improve profitability by meeting more orders when supplies are available.

• US$ 31 million of the Corporate Income Tax, Value added from increased profit from bonded warehouses rental compared with regular warehouses rental.

Fourth, indirect contractor taxation raises barriers between the lines in a supply chain and causes difficulties for the supporting industry.

The supply chain map of the automobile industry consists of four basic stages: production details, assembly details, assembly parts and overall assembly. Under Circular 103, if a foreign enterprise X requires a company Y in Vietnam to process and return to company X, company X will not pay the contractor's tax. On the other hand, if company X requires company Y after the on-site export processing for a company Z to continue production and assembly as in the supply chain, company X will have to pay tax. Thus, contracting taxes will in general create barriers between the routes of a supply chain and encourage foreign companies to outsource and repatriate the company.

The Government's Office issued the Notice No. 133 / TB-VPCP dated March 14, 1977 on the conclusion of Deputy Prime Minister Trinh Dinh Dung to focus on issuing new mechanisms and policies to promote the development of the supporting  industry. However, the fact that contractor taxation is hindering the development of the supporting industry in Vietnam as the input of the supporting industry requires 80-85% of raw materials from abroad. With the addition of a 1% tax on those inputs, the cost of production for the auxiliary industry has increased, and it is encouraging companies to directly purchase support products from abroad.

Fifth, the imposition of foreign contractor tax is contrary to international practice, causing difficulties in the application of the double tax avoidance agreement that Vietnam has signed with 76 countries, has not clarified the mechanism of payment in the case between foreign organizations together and obstructed Vietnam to follow the general trend of the world in the exchange of metal trading through the floor.

• In the world, bonded warehouses are considered non-tariff areas, goods stored in bonded warehouses are supervised by Customs and not subject to any taxes (including import tax, value added tax consumption tax, income tax, etc.) regardless of whether the owner of the goods at the bonded warehouse is located in any country because the goods stored in the bonded warehouse are considered not yet imported into the country.
• Regarding the Double Taxation Avoidance Agreement, in order to be eligible for provisions of exemption, reduction, and refund or tax reduction under these agreements, the parties concerned must carry out many procedures and wait consideration and approval from the tax authorities in Vietnam should not create a favorable business environment.
•  According to the Official Letter No. 2389 / TCT-CS dated June 1, 2016 of the General Department of Taxation, if two foreign entities exchange and buy goods in bonded warehouses, the party that earns income from the sale will have an obligation to pay contractor tax. However, the document does not clarify the mechanism of deduction, declaration and payment in this case.
• • At the international level, the trading of commodities is very popular through trading floors because of three main benefits to producers (they can be liquidated as soon as they are sold) , buyers (proactive source of raw materials), and transparent pricing, constantly updated. However, transactions on the floor mainly through e-commerce, every day the goods can be changed hundreds of times and if each transaction is subject to 1% contractor tax as in Vietnam today, the total of value of the contractor tax will exceed several times in comparison to the value of the goods.
• The European Business Association (EuroCham) issued the White Book 2017, which deals with trade and investment issues in Vietnam, which deals with taxation of contractors for goods deposited in bonded warehouses and " especially recommendation of  extending the scope of Article 25, Circular 103/2014 / TT-BTC to: 5 Foreign organizations and individuals using bonded warehouses and inland container depot(ICDs) as a cargo warehouse to support international transportation, transit, transfer, storage of goods for sale to other businesses (selling to the domestic market and / or transferring ownership in bonded warehouses) or for other processing businesses "(p. 75). That means not have to  pay foreign contractor tax.

2. Solution:

Rather than taxing contractors to increase state budget revenues, the Government should aim to develop free trade areas, tax-suspension areas in the Vietnamese territory to boost exports and increase revenues for the state budget. Corporate income tax and personal income in a sustainable way. Details of the solution are included in the attached appendix.

3.  Recommendations:

Based on the reasons mentioned above, the Vietnam Logistics Association (VLA) would like to propose the Prime Minister to consider and abolish the tax policy applicable to foreign organizations and individuals using the warehouse. Bonded warehouses and goods supplying goods to other enterprises shall be considered and the establishment of additional free-trade zones and tax-suspension areas shall be considered to attract foreign investment capital, develop the logistics industry, The key export sectors and auxiliaries, thus create more jobs, increase the profitability of businesses and tax revenue of the State in a sustainable way.