Last year, the government introduced a new Law on Tax Administration (LoTA), effective as of 1 July 2020, closely succeeded by Decree No. 126/2020/ND-CP (Decree 126), which entered into effect at the end of the same year. Delayed for 5 months and now will be applicable as from January 2022, the Vietnamese Ministry of Finance (MoF) has added the last piece to this puzzle with Circular No. 40/2021/TT-BTC (Circular 40).
Jointly, these new regulations have almost clandestinely heralded a new age of Vietnamese taxation and tax collection, including some noticeable changes to conditions for e-commerce in Vietnam. These changes seem to reflect a new strategy of local tax authorities in managing taxation by turning towards the commercial source of income, i.e. respective commercial organisations that operate digital commercial platforms. Past regulations have tried to address tax collection issues directly with every single taxpayer in the sector with unsatisfying results. Particularly with respect to incomes earned by individual merchants on e-commerce platforms, the existing mechanisms for tax collection have long needed a significant reform. Circular 40, therefore, seeks to establish competitive and fair circumstances in the market, as well as to secure Vietnam’s commercial tax revenues. Circular 40 is thus ultimately designed to resolve tax collection issues from business activities and transactions funneled through digital platforms – an area which has been under-regulated, and in arrears of the e-commerce industry’s growth rates and revenues.
Under the current suggested wording, the new circular seems to only govern the tax obligations of households, businesses and individuals residing in Vietnam (i.e. tax residents). This means that offshore merchants might not (yet) be affected by this law. Experts are, however, expecting that this gap might be closed soon, by expanding the scope of the law to overseas individuals and entities whenever engaging in commercial activities in Vietnam.
The Government’s aims to create a fair and competitive commercial environment, in which all players – private households as well as licensed corporates – pay their taxes when and to contribute to internal revenue streams. Because of this new tax mechanism, which has yet to stand the test of practice, online sellers of all kinds may have to reconsider their modi operandi. Operators of e-commerce platforms, sellers, and other businesses along the supply-chain of online shopping will also need to revisit their payment terms and upgrade their database(s) to be able to comply with the new reporting and collection standards.
Circular 40 governs the value-added tax (VAT) and personal income tax (PIT) imposed on tax resident business households and individuals, which sell at least a fraction of their goods or services via digital platforms (e-commerce). Such business activities are more closely defined by Decree 52/2013/ND-CP (Decree 52) as “the performance of the entire or part of the process of a commercial activity by electronic means connected with the internet, mobile telecommunications network or other open network”.
Because Circular 40 is devised as an implementing regulation to Decree 52, its scope of application is limited to those e-commerce activities regulated thereunder. E-commerce platforms subject to Circular 40 shall therefore include only those business entities, which are listed in Decree 52:
- Commercial entities, of which the owner is Vietnamese;
- Other Vietnamese organisations and individuals;
- Foreign individuals residing in Vietnam (tax residents); and
- Foreign business entities or organisations which are represented in Vietnam through investment activities, the establishment of a branch, a representative office, or the maintenance of a website including a Vietnamese domain.
Following the new strategy of tax collection as set out before, Article 8 of Circular 40 introduces a new tax calculation method whereby organisations owning an e commerce platform shall perform tax declarations and payments on behalf of individual merchants trading goods and services on their platforms. Procedural and technical details are governed by an executive roadmap devised by the competent tax authorities.
Owners of e-commerce platforms will be held responsible for providing electronic information pertaining to business activities and commercial traffic of individual merchants channeling sales through the respective platform. Technical requirements and restructuring of databases might therefore be required. This responsibility shall persist until an adequate tax declaration and payment has been performed by the tax debtor in question. The disclosure of information shall be in accordance with tax authorities’ requests and contain details enabling these authorities to identify the subject and scope of taxation and enforce it against the tax debtor.
The proposed new principle of tax collection has met opposition in public venues, giving way to complaints from local e-commerce platform operators in fear of onerous bureaucracy and excessive costs. This applies in particular to the responsibilities for declaring and paying the tax on behalf of the individual merchant trading goods and services on their platforms.
Moreover, there are structural issues with the consistency of this new reality. Some legal commentators claim to have identified – in Article 27.7 of Decree 52 – a regulatory conflict of Circular 40 with Decree 52. Operators of e commerce platforms might thus be exempt from withholding and paying taxes on merchants’ behalf. Namely, Article 27.7 explicitly stipulates the online merchants’ (sole) obligation to arrange for the declaration and settlement of their taxes.
In response to these concerns, tax authorities have stressed that Circular 40 was issued specifically aiming at supporting individual taxpayers. This suggests a facilitation in the procedure of declaring and paying their taxes by themselves or through a proxy, according to applicable tax law. In this reading, Circular 40 is crafted to aim at those cases, in which e-commerce platforms agree to declare, pay and withhold due tax as a proxy of the individual merchant. This interpretation is supported by the wording of Circular 40. It seems to only require e-commerce platforms to provide relevant information to support the individual merchant to declare the tax fully, correctly and on time.
Taking a step back, the controversy clustering around conflicting provisions of tax law (Circular 40 vs. Decree 52) may well be irrelevant. In fact, such responsibility of the individual (or legal entity) to provide tax-relevant information to authorities can be – already since July 2020 – alternatively be based on Article 19 of the LoTA. This regulation entitles tax management agencies to approach any relevant organisation or individual with a request to provide information and documentation relating to the determination of tax duties. This individual obligation may be extended to tax collection procedures of other tax debtors, rendering the counter arguments proposed on the base of subordinate laws (decrees and circulars) redundant.
It is currently not clear if there will be any further amendments to Circular 40 on the back of this public discussion. Participants in the e-commerce industry – regardless of their origin and business model – should therefore carefully assess their exposure to these changes and their technical and legal capability in complying with them. As an untested new tool in the hands of local tax collectors, this new mechanism may be a double-edged sword. E-commerce platforms should revisit their internal rules and policies on the collection and use of their merchants’ information. The goal should be to devise a concept, under which individual merchants’ information can be provided to tax authorities with the same degree of care, transparency and accessibility, as their own information. As a result of this ‘changing of the guards’ in tax law, e commerce platforms may also have to revise their commercial strategy by (re-)allocating these risks amongst the parties.
Mark Oakley / Managing Partner
Leif Schneider / Senior Associate
Huyen Pham / Senior Associate
This legal update is not an advice and should not be treated as such.