For foreign-invested enterprises (FDI), especially Japanese companies, transactions with foreign contractors and service providers are a regular business activity. Along with these transactions, foreign contractor tax accounting entries often cause difficulties for accounting staff in determining how to properly recognize and record them in compliance with regulations. This article by KMC not only provides detailed guidance on accounting treatment but also suggests solutions to optimize tax obligations for enterprises.
What is foreign contractor tax?
Foreign contractor tax (FCT) is a type of tax applied to foreign organizations and individuals that do not have a permanent establishment in Vietnam but generate income from providing goods or services in Vietnam under contractor or subcontractor agreements.
The taxes applicable under foreign contractor tax include:
- Value-added tax (VAT): Applied to activities of providing goods and services in Vietnam.
- Corporate income tax (CIT): Applied to foreign organizations generating income from business activities in Vietnam.
- Personal income tax (PIT): Applied to foreign individuals earning income arising in Vietnam.
For other types of taxes, fees, and charges, foreign contractors and foreign subcontractors shall comply with the provisions of current laws on taxes, fees, and charges.
Foreign contractor tax calculation process
The foreign contractor tax calculation process is carried out in 3 steps:
1. Determine whether the purchase transaction or goods fall under the scope of foreign contractor tax (FCT).
2. Identify the applicable tax rates and relevant provisions in the contract.
3. Calculate the foreign contractor tax liability payable.
To ensure the proper application and accurate accounting of FCT, please refer to the additional notes and detailed guidance below:
Determining whether a purchase or goods transaction is subject to Foreign Contractor Tax (FCT).
Why do FDI enterprises need to manage foreign contractor tax from the contract stage?
Foreign Contractor Tax (FCT) obligations arise as soon as services are rendered within the territory of Vietnam, regardless of whether payment is made domestically or overseas. A solely reactive approach of focusing on foreign contractor tax accounting only when costs arise is considered passive and may expose the enterprise to unexpected cost overruns and disputes with counterparties. FDI enterprises, given their cross-border nature of operations, are required to adopt a proactive approach: clearly identifying taxable subjects, accurately estimating tax costs, and structuring contractual provisions (such as NET/GROSS price clauses) to clearly define financial responsibilities. This not only enhances cost transparency but also serves as a foundation for accurate and efficient accounting treatment thereafter.
Determine tax obligations directly within the contract terms.
Before moving into specific accounting entries, the key step is to assess the service contract with the foreign contractor. The enterprise needs to answer the following questions:
- Does this service fall under the scope of foreign contractor tax (FCT) under Vietnamese regulations?
- Is the contractor applying a Double Taxation Agreement (DTA) that Vietnam has signed with their country? This directly affects the applicable tax rate.
- Is the contract value inclusive of tax (GROSS) or exclusive of tax (NET)? This determines how taxable revenue is calculated and has a direct impact on the enterprise’s cash flow.
Methods of tax calculation and determination of taxable revenue
After determining tax obligations from the contract, the next step is to apply the correct tax calculation method. Foreign contractor tax is applied under three main methods:
- Withholding method: Applicable to foreign contractors with a permanent establishment in Vietnam or in cases where the contractor registers and directly declares taxes. VAT is deducted in accordance with standard regulations.
- Fixed-rate method (deemed method): Commonly applied to contractors without a permanent establishment. Tax is calculated based on a prescribed percentage rate applied to taxable revenue.
- Mixed method: A combination of withholding and fixed-rate methods applied to specific special cases.
Formula for calculating foreign contractor tax
After calculating the tax, the accountant will record foreign contractor tax in the accounting books using three methods:
Net price method (contract value exclusive of tax)
VAT = Taxable VAT revenue × VAT deemed rate on revenue
Where:
Taxable VAT revenue = Revenue excluding VAT / (1 – VAT deemed rate on revenue)
CIT = Taxable CIT revenue × CIT rate
Gross price method (contract value inclusive of tax)
VAT = Contract value × VAT deemed rate on revenue
CIT = (Contract value – VAT) × CIT rate
Tax calculation based on contract value excluding VAT (CIT borne by the foreign contractor)
VAT = Taxable VAT revenue × VAT deemed rate on revenue
Where:
VAT taxable revenue = Revenue exclusive of VAT / (1 – VAT calculation percentage rate applied to revenue)
Corporate Income Tax (CIT) = Contract value × CIT tax rate
Summary table of VAT and CIT tax rates by industry
Applying incorrect tax rates is a common mistake that leads to tax reassessment and penalties. Before calculating payable taxes, enterprises must determine the nature of services provided by the foreign contractor to apply the correct tax rates.
Below is a summary table of common tax rates (applicable from 01/01/2025 under current regulations):
Industry / Service Type | VAT Rate | CIT Rate (Deemed) |
| Services, machinery and equipment leasing, insurance | 10% | 5% |
| Construction, installation without supply of materials | 10% | 2% |
| Manufacturing, transportation, services associated with goods | 10% | 1% |
| Securities transfer, capital transfer | 0% (VAT not applicable) | 0.10% |
| Lending, royalties, franchising | 5% | 5% |
Note: The above tax rates may be subject to change depending on policy updates and cases where a Double Taxation Agreement (DTA) is applied. Enterprises should regularly update the latest legal documents from official legal information portals to ensure accurate accounting entries and full compliance with current regulations.
Guidance on foreign contractor tax accounting: Applied to each specific accounting entry.
According to Point 2.7, Article 6 of Circular 78/2014/TT-BTC, non-deductible expenses when calculating corporate income tax (CIT) include corporate income tax itself, except in cases where the enterprise pays CIT on behalf of a foreign contractor or subcontractor and, as agreed in the contract, the revenue received by the foreign contractor or subcontractor is exclusive of CIT.
Therefore, foreign contractor CIT under the NET price method is considered a deductible reasonable expense. In contrast, foreign contractor CIT under the GROSS price method is not considered a deductible expense and must be monitored under Account 811. Input VAT of foreign contractor tax is deductible and recorded under Account 133.
Detailed accounting entries for foreign contractor tax will be recorded as follows:
Case of GROSS price contract
For contracts applying the GROSS price method, the enterprise’s accountant records the following accounting entries in sequence:
- Payables and tax recognition:
Dr 627, 642
Dr 811 – Reflects CIT (as it is not considered a deductible expense)
Dr 133 – Input VAT credit
Cr 331 – Contract value after deducting foreign contractor tax
Cr 3338 – Foreign contractor tax payable
- Upon tax payment:
Dr 3338
Cr 112
Case of NET price contract
For contracts applying the NET price method, the accountant records the following entries in sequence:
- Foreign contractor payable:
Dr 627, 642: Contract value
Cr 331: Contract value
- VAT and CIT:
Dr 133: Input VAT credit
Dr 627, 642: CIT amount
Cr 3338: Total VAT and CIT payable
- Upon tax payment:
Dr 3338
Cr 111, 112
Case of contract excluding VAT
In the case where the contract excludes VAT and the CIT is borne by the foreign contractor, the accountant will record the following accounting entries in sequence:
- Payables and taxes:
Dr 627, 642 – Contract value excluding foreign contractor VAT
Dr 811 – Reflects CIT expense
Dr 133 – Input VAT credit
Cr 331 – Contract value excluding foreign contractor VAT
Cr 3338 – Foreign contractor tax payable
- Upon tax payment:
Dr 3338
Cr 111, 112
Common errors and how to prevent them when accounting for foreign contractor tax
During the process of calculating and recording foreign contractor tax, many organizations and accounting staff still make mistakes that lead to incorrect accounting entries. Below, KMC shares common errors and corresponding preventive solutions for each case.
- Incorrect tax rates: Applying tax rates that do not match the service industry.
Prevention: Accounting staff should always refer to the service classification table and the latest legal regulation - Incorrect taxable revenue: Failing to convert foreign currency using the exchange rate at the time the tax obligation arises, or miscalculating under GROSS/NET contract terms.
Prevention: Clearly define pricing terms and applicable exchange rates directly in the contract. - Incorrect account posting: Recording foreign contractor VAT into Account 133 (input VAT credit) while it should be recognized as an expense.
Prevention: Enterprises should train accountants to clearly understand the difference between standard VAT and foreign contractor VAT to ensure accurate accounting treatment and entries.
- Omission of withholding tax obligation: Failure to declare and pay tax on behalf of the foreign contractor, leading to late payment penalties.
Prevention: Establish a clear internal checklist and process for all transactions with foreign contractors to ensure no tax obligations are overlooked.
Tax optimization under Double Taxation Agreements (DTA)
Vietnam has currently signed Double Taxation Agreements (DTAs) with many countries, including Japan. This is a powerful tool that helps FDI enterprises reduce their tax burden. For example, under the Vietnam – Japan DTA, if a Japanese contractor does not have a permanent establishment in Vietnam, they may be exempt from corporate income tax (CIT) in Vietnam for certain types of services. To benefit from this tax relief, the contractor must provide a Tax Residence Certificate and other required supporting documents.
This process should be prepared early, right from the contract negotiation stage, and the documents must be submitted to the Vietnamese tax authorities when carrying out tax declaration and payment procedures.
Checklist of required documents when working with foreign contractors
To ensure complete tax documentation for foreign contractor tax accounting and future finalization, FDI enterprises should retain the following records:
Service contracts and contract appendices (in both English and Vietnamese, notarized).
- Invoices and payment documents.
- Foreign contractor tax declaration forms and tax payment receipts.
- Tax Residence Certificate (if DTA is applied).
- Official correspondence with tax authorities related to the transactions (if any).
The above is KMC’s detailed guidance on foreign contractor tax accounting, including accurate calculation methods for different cases.
If you still have difficulties in foreign contractor tax accounting entries or are unsure which tax calculation method and formula to apply correctly, please contact KMC immediately. Our team of experienced accounting specialists is ready to provide in-depth guidance on accounting entries for enterprises.
With a highly experienced team well-versed in accounting and tax matters for FDI enterprises, we are committed to delivering accurate, comprehensive solutions that ensure full legal compliance.
For expert consultation, please contact our hotline: 081 489 4789.
